Efforts to address housing finance reform are starting to heat up, although the finish line is still probably a long way off. Fannie Mae and Freddie Mac remain in conservatorship, even though they are making money, and the Federal Reserve is a major buyer of residential mortgage backed securities. Neither of these conditions is likely to be sustained in the long run. We believe that some sort of GSE housing finance market reform is inevitable and that it will likely involve several core elements, although there could be significant differences in the details.

First, we believe that some form of federally guaranteed housing funding instrument, like a federally guaranteed mortgage backed security, is likely. Such a guarantee would attract funding to the housing market, keep mortgage rates low relative to other market rates and provide some distance between the housing market, which has shown significant volatility over the years, and the banking system. Another “implicit” guarantee seems unlikely given the history of the GSEs in the most recent financial crisis. While some would prefer that housing funding be wholly private, the long history of supporting single family housing in the U.S. suggests that the guarantee route is likely.