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Modeling the Future: Restructuring the Secondary Mortgage Market

A decade after Fannie Mae and Freddie Mac were put under the conservatorship of the Federal Housing Finance Agency (FHFA), the voices for housing finance reform are getting louder.

While Sen. Mike Crapo released an outline of what housing finance reform should look like last week, the National Association of Realtors (NAR) collaborated with Susan Wachter, the Albert Sussman Professor of Real Estate Finance at The Wharton School of the University of Pennsylvania, and Richard Cooperstein, Head of Risk Management at Andrew Davidson and Company, Inc. on  new research that explores the ideal restructuring of the secondary mortgage market.

The research was released as a working paper by NAR recently and proposed a "redesigned alternative based on economic principles and national objectives." It explained why housing finance markets differ from purely competitive markets but are similar to those for public utilities, thus informing the "nature of reform needed to ensure financial stability going forward."

The working paper touched upon six key initiatives that could be implemented to realize the vision of holistic housing finance reform. They included:

  • Leveraging reforms and innovations implemented since the crisis while completing the process with instrumental updates for a fully functioning liquid market
  • Promoting competition in the secondary market through proven structures to correct market failures
  • Preserving the 30-year fixed-rate mortgage and focusing the mission on liquid secondary markets for Middle America and underserved borrowers
  • Minimizing the cost to consumers in normal stress periods while maximizing access for creditworthy borrowers
  • Protecting taxpayers by using private capital
  • Maintaining simplicity in the transition while avoiding market disruptions

The research revealed that the vision of a reformed housing finance market first recognized the critical role of the government-sponsored enterprises in housing finance, which was the same need that led to their initial creation. It also built on the transformed enterprises following conservatorship and codified a structure that was "effective, resilient, and fair, balancing the tension of private operating companies with the public mission."

Click here to read the full working paper.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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