Mortgage Interventions and Economic Growth
Remarks for the "Appropriate Government Role in U.S. Mortgage Markets" Workshop, Federal Reserve Bank of New York
Our assignment for this session was to “treat the experience of the Great Recession as a laboratory for evaluating the effects of specific interventions that took place at that time on economic performance.” I will briefly reflect on some of the lessons I drew from my time as Assistant Secretary for Economic Policy at the Treasury Department, where I worked on several of the key interventions. Some of the points will overlap with findings from the academic literature but some will not—because they are more practically oriented or just more speculative.
In particular, I will describe what I think are the big take-aways as well as some unanswered questions regarding the GSE conservatorship, the Home Affordable Modification Program, the Home Affordable Refinance Program, and the Hardest Hit Fund.
The GSE Conservatorship
Starting with the GSE conservatorship, the most important lesson I drew from the episode is that an explicit and broad government backstop can stop the mortgage market from going down. In terms of economic growth, it is widely accepted that the downturn in housing markets and the economy more broadly would have been worse if the government had not stepped in.
A second lesson—and this is one that should be taken to heart by people working on the future housing finance system—us that the government will indeed intervene in these sorts of situations. The government is simply not going to stand by and watch the housing market go down. As a result, it is much better to explicitly build this role for the government into the new housing finance system rather than have the government do it on a seat-of-the-pants basis when the need arises. I think this point is one of the most powerful arguments for why we cannot fully privatize the housing finance system.
A third lesson—and I am moving even further into political economy here—is that the politics are such that it appears to be extraordinarily difficult to extract ourselves from the current situation. In particular, the fact that there are so many politically powerful stakeholders with varied interests is proving to be a real obstacle to passing legislation that substantively overhauls the housing finance system. I hope I am wrong about this, but we may be stuck with the conservatorship (probably with some modifications to the arrangement) for some time.
The good news would be that I do not think the status quo is materially constraining economic growth—at least in the near term—or creating significant macro risk. On the growth question, having so much government involvement is probably bad for efficiency and innovation but I do not think this is a first-order issue right now. As for macro risk, the government is directly backstopping the mortgage market so that will probably reduce volatility. Of course, good arguments can be made that we do not want the taxpayer bearing all this risk. In this regard, one positive development is that the GSEs are now selling off a considerable amount of the noncatastrophic risk through their credit-risk transfer programs.
There are also some unanswered questions about the conservatorship where more research would be constructive. To start, it would be good to have more thinking on what exactly are the deleterious effects of the conservatorship. For example, it is not uncommon to hear that we need to do comprehensive housing finance reform to address the problem that mortgage credit is still tight for higher-risk borrowers. Another example would be the speculation that the conservatorship has been a key obstacle to the revival of the private-label mortgage backed securities market. In both cases, the exact linkages are not all that clear (and, in the latter case, the need for a private-label mortgage-backed securities market in our financial system is also not exactly clear). I think it would help us motivate the need for comprehensive housing reform to have a crisper story about what we are fixing.