federal credit and insurance programs: housing by john m. quigley university of california berkeley...
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Federal Credit and Insurance Programs: Housing
By John M. Quigley
University of California
Berkeley
Federal Reserve Bank of St. Louis
October 20-21-2005
Federal Housing Policy
Direct: Renter Assistance Supply
Public Housing Tax Credit Payments
Demand Shelter Allowances
Indirect: Homeowner Assistance Tax Expenditures Credit, Guarantees, Insurance
Homeowner Assistance Guarantees and Insurance
Federal Housing Administration Department of Housing and Urban Development
Veterans Administration Department of Veterans’ Affairs
Farm Service Administration Department of Agriculture
Credit Ginnie Mae
Department of Housing and Urban Development Fannie Mae
Private Firm, Federally Chartered Freddie Mac
Private Firm, Federally Chartered
Guarantees and Insurance 1920s: Small Mortgage Market
Short Term, Non –Amortizing Mortgages, Contract Purchase
1929: No Mortgage Market Credit Contraction, Foreclosure
1934: FHA Mortgage Insurance against Default
Figure 1 US Housing Starts, 1900-2004
(thousands of units)
0
500
1,000
1,500
2,000
2,500
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000YearSource: Doan (1997)
Source: http://www.census.gov/const/startsan.pdf
FHA builds the mortgage market Guarantees and Insurance
Low Interest Rates 20 Year Term Self Amortizing Standardization
Appraisals Credit History Financial Capacity
Key Insurance Device Mutual Mortgage Insurance Fund “actuarially sound” Small Transfers Widely Available
VA Home Loans 1944 GI Bill
Temporary “readjustment” is transformed to a permanent program
Low interest rates, no down payments
Key Guarantee Device Federally subsidized guarantee for 60
percent of the face value of a veteran’s mortgage
Figure 2 Value of FHA and VA Guaranteed Originations, 1935-2004
(billions of curent dollars)
0
50
100
150
200
250
1935 1945 1955 1965 1975 1985 1995
Year
VAFHA
Source:Statistical Abstract of the U.SSource: National Association of Homebuilders (1986)Source: http://www.fanniemae.com/ir/pdf/resources/housingmortgage.pdfhttp://www.fanniemae.com/ir/pdf/resources/housingmortgage.pdf
Figure 3 Value of FHA & VA Orginations/Total Originations, 1939-2004
(Percent)
0
5
10
15
20
25
30
35
40
45
1939 1949 1959 1969 1979 1989 1999
Year
VAFHA
Source: Statistical Abstract of the U.S. Source: www.huduser.org/periodicals/ushmc/summer99/histdat5.htmlSource: http://www.fanniemae.com/ir/pdf/resources/housingmortgage.pdfData for 1965-1969 total orginations are approximate
Figure 4 FHA and VA Share of All Insured Mortgages, 1980-1999
(Percent)
0
10
20
30
40
50
60
70
80
1980 1985 1990 1995
Year
VAFHA
Source: http://www.huduser.org/periodicals/ushmc/winter99/histdat4.html#tbl4_16:
Figure 5 Estimated Percent of New Single Family Homes
Eligible for FHA Insurance, 1964-2004
0
10
20
30
40
50
60
70
80
90
100
1964 1969 1974 1979 1984 1989 1994 1999 2004
YearSource: Vandell (1995)Source: US Census of Construction, Series C25Reported figures are underestimates after 1993
Figure 6 Estimated Percent of New Single Family Homes
Eligible for VA Insurance, 1964-2004
0
10
20
30
40
50
60
70
80
90
100
1964 1969 1974 1979 1984 1989 1994 1999 2004
YearSource: Source: U.S. Census of Construction, Series C25
Figure 7FHA Insured Mortgage Debt Outstanding, 1949-2003
(billions of current dollars)
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
1949 1959 1969 1979 1989 1999
YearSource: Econ. Rpt. of the President, Table B-76
Figure 8Multifamily and Commerical Share of FHA/VA Portfolio
1949-2003(Percent)
0
2
4
6
8
10
12
14
16
18
20
1949 1959 1969 1979 1989 1999
Yearsource:Economic Report of the President 2004, B-75
Figure 9FHA/VA Market Share of Originations
by Borrower's Race, 1997-2003(Percent)
0
10
20
30
40
50
60
1997 1998 1999 2000 2001 2002 2003
Year
BlackHispanicWhite
source: http://www.ffiec.gov/hmda/online_rpts.htm
Figure 10FHA/VA Market Share by Census Tract Income, 1997-2003
(Percent)
0
5
10
15
20
25
30
35
40
1997 1998 1999 2000 2001 2002 2003
Year
LowModerateMiddleUpper
source: http://www.ffiec.gov/hmda/online_rpts.htm
Figure 11FHA/VA/ Market Share of Originations by
Minority Population as Percent of Census Tract, 1997-2003(Percent)
0
5
10
15
20
25
30
35
40
45
1997 1998 1999 2000 2001 2002 2003
Year
<10%20-49%80-100%
source: http://www.ffiec.gov/hmda/online_rpts.htm
Table 1Distribution of New FHA/VA Mortgages
By Borrower Income, Race, and Neighborhood, 1997-2003
1997 1998 1999 2000 2001 2002 2003
Race:White 67 67 58 63 65 64 65Black 13 13 16 14 13 13 13Hispanic 14 14 18 17 17 17 17Other 6 6 7 6 6 6 5Income:Low-Mod 43 45 46 45 47 50 50Middle 36 35 35 35 34 32 32Upper 20 20 19 20 19 18 17Percent Minority Census Tract<10 39 39 39 39 41 41 2510-49 48 48 48 48 47 47 5550-79 8 8 8 8 7 7 1280+ 6 5 5 5 5 5 8
Source:
ECONOMIC RATIONALE
1. Racial Discrimination and Minority Access
2. “Continuing Demonstration”
3. Increased Homeownership and Housing Consumption
Effects on Homeownership
1. HUD Studies of MortgagesBunce, 1995
2. Simulations using Standard Data SetsSIPPAHSNLSYPSID
3. Econometric evidence from IPUMSMonroe, 2001Increase in homeownershipWhite households 0.6%Black households 1.4%
Mortgage Credit
1932: short term loans to thrifts through FHLBs
1938: Federal purchase of FHA and VA mortgages through FNMA
1968: FNMA reconstituted as GSE 1970: FHLMC formed as GSE
Ginnie MaeFHA & VA insured morgages
$126
$72
Privately Insured Mortgages
Figure 13Schematic of Mortgage Backed Security Industry
Fannie Mae Freddie MacAgency MBS
$865
Generally low balance mortgages
Mortgages do not conform to balance limits and/or underwriting rules
Mortgages conform to balance limits and underwriting rules
Explicit government guarantee
Implicit government guaranteeCredit enhancement: subordination, over collaterization
1 Source: Inside MBS/ABS
Private Label MBS
Amount Issued1
(1995, Billion)$110 $86 $49
Amount Issued1
(2004, Billion)
$527 $365
Figure 14Freddie Mac and Fannie Mae
Total Assets, 1986-2003 (Billions of Current dollars)
0
250
500
750
1,000
1,250
1986 1990 1994 1998 2002
Year
Freddie Mac
Fannie Mae
Figure 15Freddie Mac and Fannie Mae
Total MBS Outstanding, 1986-2003 (Billions of Current Dollars)
0
250
500
750
1,000
1,250
1,500
1986 1990 1994 1998 2002
Year
Freddie Mac
Fannie Mae
GSE and Fundamental Change in Secondary Market
1960s: James Stewart Model 1970s: Decentralization and
Specialization Origination Investment Servicing
1980s: Technology
Lines of Business of GSEs
1. Exemption from S and L Taxes2. Treasury has authority to purchase GSE
securities3. GSE’s securites are “Government Securities”4. Federal Reserve is Fiscal Agent5. No insolvency procedures in place
1. Issuance of MBS guaranteed by the agency
2. Investment in whole mortgages and MBS by the agency
Subsidies Provided to GSEs
Figure 16Freddie Mac and Fannie MaeRetained Portfolio, 1986-2003
(Billions of Current Dollars)
0
250
500
750
1,000
1986 1990 1994 1998 2002
Year
Freddie Mac
Fannie Mae
Figure 17Freddie Mac and Fannie Mae
Total Debt, 1986-2003 (Billions of Current Dollars)
0
250
500
750
1,000
1986 1990 1994 1998 2002Year
Freddie Mac
Fannie Mae
Subsidy Provided by implicit Guarantee?
Yield Spread between GSE and Comparable firms
benchmark?
comparison
with indexes?
at issue?
US Treasury Bloomberg Agency vs(1996) A Financials 53-55
Ambrose and Varga (1996) Fixed Income Fannie Mae vsResearch Program AA Financials 37-46
AA Corporate 38-39A Financials 56-72A Corporate 55-65
Freddie Mac Lehman Freddie vs(1996) Relative Value AA & A 39
AAA 23
Toevs Lehman Fannie Mae vs(2000) Bond Indexes AA-Indexes 37
Pearce and Miller Bloomberg Agency vs(2001) AA Financials 37
Ambrose and Varga Fixed Investment Freddie and Fannie vs(2002) Securities Database AA Banks 25-29
Nothaft, et al Fixed Investment Freddie and Fannie vs(2002) Securities Database AA Debentures 30
A Debentures 45AA MTNs 27A MTNs 34
Passmore, et al Bloomberg Lehman Freddie and Fannie vs(2005) AAA & AA Financials:
68 Firms 4144 Firms 3815 Firms 38
Source: Nothaft, et al (2002), Ambrose and Varga (2002), Passmore, et al (2005).
Table 2Estimates of GSE Funding Advantage
Author ComparisonData Spread in Basis Points
ECONOMIC EFFECTS
Housing Market Lower Mortgage Rates HUD Goals
Broader Issues Stability of Mortgage and Construction
Markets Investment in Other Forms of Capital?
Hendershott and Shilling 1986 California 24-39(1989)
ICF 1987 California 26(1990) 7 States 23
Cotterman and Pearce 1989-1993 California 25-50(1996) 11 States 24-60
Pearce 1992-1999 California 27(2000) 11 States 24
Ambrose, Buttimer and Thibodeau
1990-1999 Dallas 16-24
(2001)
Naranjo and Toevs 1986-1998 US 8-43(2002)
Passmore, Sparks and Ingpen 1992-1999 California 18-23(2002)
CBO (2001) 1995-2000 US 23
McKenzie (2002) 1986-2000 US 221996-2000 US 19
Ambrose, La Cour-Little 1995-1997 US 6and Saunders (2004)
Woodward 1996-2001 1996-2001 US 35-52(2004b)
Passmore, Sherlan and 1997-2003 US 15-18Burgess (2005)
Source: McKenzie (2002); Ambrose, La Cour-Little, and Saunders, (2004); Passmore, Sherland, and Burgess, (2005); Woodward (2004b).
Table 3Estimates of Reduction in Mortgage
Interest Rates Attributable to GSEs
Author RegionReduction in Basis
PointsTime Period
Figure 18GSE "Low-Moderate Income" Housing Goal, 1996-2008
(Percent of New Loans to Households Below Area Median Income)
30
40
50
60
1996 1998 2000 2002 2004 2006 2008
Year
FNMA
FHLMCGoal
Source: HUD Office of Policy Research and Development
Figure 19GSE "Underserved Area Housing" Goal 1996-2008
(Percent of New Loans Credited Towards Goal)
15
20
25
30
35
40
45
1996 1998 2000 2002 2004 2006 2008
Year
FNMA
FHLMC
Goal
Source: HUD Office of Policy Research and Development
Figure 20GSE "Special Affordable" Housing Goal, 1996-2008
(Percent of New Loans Credited Towards Goal)
10
15
20
25
30
1996 1998 2000 2002 2004 2006 2008
Year
FNMAFHLMCGoal
Source: HUD Office of Policy Research and Development
Effects of Imposition of Goals
Ambrose and Thibodeau, 2004 Ambrose and Pennington-Cross, 2000 Gyourko and Hu, 2002 Bostic and Gabriel, 2005
Broader Issues
Aaron, 1972! Peek and Wilcox, 2003, 2004 Lehnert, et al, 2005 Perli and Sack, 2003
Why do Any of This?
1. Create Missing MarketsMortgagesTradeable Liquid Mortgage SecuritiesDone
2. Encourage HomeownershipExternalities
Boehm and Scholottman, 2002DiPasquale and Glaeser, 1999Haurin, et al, 2002
Encourage Homeownership?1. FHA may increase homeownership by a point or so
2. GSEs may reduce mortgage interest rates by 0.20 or 0.25 percent
3. FHA insurance for $173,000 anywhere$312,000 where housing prices are
high$469,000 in Maui
4. GSE purchase of Mortgage for $360,000 anywhere$540,000 in Maui$270,000 for second home in Maui
and the cost?
5. Annual Cost is $19,600,000,000 (CBO, 2004) Total Subsidy is $106,000,000,000 (Passmore, 2005)Contingent Liability is $288,000,000,000 (Frame & White, 2005)Annual Insurance $7,900,000,000Value is (Lucas & McDonald, 2005)
What to do?
1. Target Marginal HomebuyersFreeze Limits on SizeLimit to First Time BuyersIncrease Target Goals
2. Eliminate Portfolio HoldingsSlowly Saves Monitoring Increases Diversification
3. Charge for Free Disaster Insurance