What to Eliminate and Keep in Housing Reform

William Mills Agency recently attended the Federal Reserve Bank of Chicago’s 49th Annual Conference on Bank Structure and Competition. Here is a recap of major discussions at the conference. This is the 1st of a three part series.

Changes to Housing Regulations: Federal Reserve Bank Conference: Part 1

As the government considers how housing finance should be reformed in order to avoid the financial crisis of 2007-2010, there are several practices that should be changed and a few to keep in any reform plan, according to Federal Reserve Bank of New York speakers who presented their ideas at the conference.

Among the recommended changes from Federal Reserve Bank of New York policy specialists Trish Mosser, Joe Tracy and Josh Wright:

  • Require government tail risk insurance to be explicitly and fairly priced.
  • More capital, and liquidity standards consistent with the risks of the business.
  • No retained investment portfolios.
  • Align risk-taking incentives across private sector participants – lenders, securitizers, private insurers – and the government.
  • Clearly distinguish affordable housing goals from business activity.

However, not everything was wrong with the housing finance system, the presenters agreed. They recommend that any reform keep the following features:

  • “Skin in the game” for originators and the securitzers.
  • Product standardization and economies of scale in the current securitization infrastructure.
  • The liquidity benefits of the market for issuing and trading mortgage-backed securities.

They recommend a lender-owned cooperative entity for securitization. The cooperative would be a highly regulated, mutually owned entity capitalized by fees from mortgage originators who would be required to buy mortgage retail risk reinsurance from the government. The cooperative would perform a similar function of providing a secondary housing market and securitization, but would be owned by lenders. It would have a restrictive structure as well as a well-defined governance structure and would be well regulated.

Such a plan would maintain the flow of credit during periods of stress and reduce the cyclicality of credit, they contend.

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