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The Global Importance of Government Guarantees in Mortgage Finance

The Global Importance of Government Guarantees in Mortgage Finance

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David Min details the several ways the U.S. government guarantee on residential mortgages works and then compares those processes with the very different but equally important government role in guaranteeing home mortgages across Europe.
David Min details the several ways the U.S. government guarantee on residential mortgages works and then compares those processes with the very different but equally important government role in guaranteeing home mortgages across Europe.

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Published by: Center for American Progress on May 18, 2012
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1Center or American Progress |  The Global Importance o Government Guarantees in Mortgage Finance
 The Global Importance of GovernmentGuarantees in Mortgage Finance
An Analysis of How Guarantees Workin Different Developed Nations
David Min May 2012
Introduction
Critics o the ederal government’s role in the mortgage markets oen claim the UnitedStates is unique among developed countries in providing signicant guarantees orhome mortgage nancing.
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A corollary to this critique is that European countries donot provide government guarantees or mortgage nance. Both o these statements are wrong, because they ail to understand the ways in which other countries, particularly European ones, support their residential mortgage markets.Tose who believe the United States is unique in supporting its mortgage nance systemocus on the government backing o the mortgage securitization entities Fannie Mae,Freddie Mac, and Ginnie Mae, which together account or about hal o all outstandingU.S. home loans (about 90 percent since the 2008 nancial crisis). Tese three institu-tions purchase and pool mortgages meeting certain standards and sell the cash owsrom these mortgage pools to investors in the orm o mortgage-backed securities, backed by a government guarantee.
2
 Critics o the government’s role in the U.S. housing nance market note that the UnitedStates is one o only a handul o countries that oer such guarantees or securitiza-tion—the others being Canada, Japan, and South Korea. What this argument ignoresis that securitization is not an important source o mortgage nance or most o the world’s developed countries.In Western Europe, or example, traditional bank lenders—unded by deposits and, to alesser extent, covered bonds (a type o bond that is collateralized by mortgages held by the issuing bank)
3
—are the primary source o residential mortgage nance. Conversely,securitization is not a major source o mortgage unding or any o these countries. Tus,it makes no sense to ocus on guarantees or securitization, while ignoring guaranteesor these bank obligations, when considering whether European governments providesupport to their residential mortgage markets.
 
2Center or American Progress |  The Global Importance o Government Guarantees in Mortgage Finance
 What does make sense is to examine the ways in which European governments doguarantee residential mortgage unding, both explicitly and implicitly. Tis issue brie  will do just that—detailing the several ways the U.S. government guarantee on residen-tial mortgages works and then comparing those processes with the very dierent butequally important government role in guaranteeing home mortgages across Europe.
 The U.S. guarantee in mortgage markets takes several forms
Te ederal government’s role in mortgage nance takes several dierent orms, themost important being:
•
 A ederal guarantee behind so-called “agency securities,” or the mortgage-backed secu-rities and bonds issued by Ginnie Mae, Fannie Mae, and Freddie Mac
•
 A ederal guarantee on deposits at banks, thris, and other ederally regulated depository institutions used to nance home mortgages and other important orms o lending
4
Currently, the guarantee behindagency securities is the primary  way in which the ederal govern-ment backstops the U.S. mortgagesystem. Agency securities havenanced more than hal o alloutstanding residential mortgages,including 90 percent o all mort-gages originated since the 2008nancial crisis.But agency securities did notalways dominate the U.S. mort-gage system. For most o the 20thcentury, up until the early 1980s,deposits at banks and thris werethe major source o U.S. mortgagenance, unding more than 70percent o all home loans held onthe lenders’ balance sheets. Tesedeposits were guaranteed by ed-eral deposit insurance, introducedduring the New Deal to ensure a broad and constant source o mort-gage unding. (see Figure 1)
FIGURE 1
The changing face of U.S. residential mortgage finance
Share of outstanding residential mortgages, by financing channel
 
0%10%20%30%40%50%60%70%80%
    1    9    4    5     1    9    4    7     1    9    4    9     1    9    5    1     1    9    5    3     1    9    5    5     1    9    5    7     1    9    5    9     1    9    6    1     1    9    6    3     1    9    6    5     1    9    6    7     1    9    6    9     1    9    7    1     1    9    7    3     1    9    7    5     1    9    7    7     1    9    7    9     1    9    8    1     1    9    8    3     1    9    8    5     1    9    8    7     1    9    8    9     1    9    9    1     1    9    9    3     1    9    9    5     1    9    9    7     1    9    9    9     2    0    0    1     2    0    0    3     2    0    0    5     2    0    0    7     2    0    0    9 
Share of total outstanding single-family residential mortgage debt
Source: Federal Reserve Flow of Funds
Bank depositsAgency securities (mortgage-backed securities and debt backed by the federal government)Private-label securities (mortgage-backed securities not guaranteed by the federal government)Other, including private-label securities, life insurance companies, individuals
 
3Center or American Progress |  The Global Importance o Government Guarantees in Mortgage Finance
European governments guarantee banks, not mortgage-backed securities
Tose who claim that the United States is unique in supporting its mortgage nancesystem ocus almost entirely on guarantees or securitization.
5
Tey note that Europeangovernments do not provide guarantees or mortgage-backed securities analogous to U.S.guarantees or agency securities.
6
But this analysis ignores a ew key acts:
•
Unlike in the United States, securitization is not the major source o mortgage undingin any European country.
•
Bank obligations—most notably deposits and, to a lesser extent, covered bonds—pro- vide the vast majority o European mortgage nancing.
•
European governments provide enormous levels o support through explicit andimplicit guarantees or these bank obligations.Let’s look at each o these points in more detail.
Mortgage-backed securities are not an important sourceof mortgage funding in Europe
One o the leading critics o the U.S.mortgage nance system, San DiegoState University proessor MichaelLea, has correctly noted that Europeangovernments don’t provide guaranteesin mortgage nance. But what Lea hasignored—something aptly illustrated by his own chart, reproduced here asFigure 2—is that mortgage-backedsecurities aren’t a particularly impor-tant source o nancing in WesternEuropean countries. In Germany andDenmark, or example, the market shareo mortgage-backed securities is essen-tially negligible, while in the UnitedKingdom and Spain, mortgage-backedsecurities play a larger but still ar lessimportant role than other sources o mortgage nancing. (see Figure 2)In other words, it isn’t particularly important that European governments don’tguarantee securitization because this is not a major source o mortgage unding inEuropean countries.
FIGURE 2
Sources of mortgage finance are different in Europe
Mortgage funding channels in select European countries
100%
  A  u  s  t  r  a   l   i  a  C  a  n  a  d  a   D  e  n  m  a  r   k  J  a  p  a  n  S  p  a   i  n   N  e  t   h  e  r   l  a  n  d  s  G  e  r  m  a  n  y  S  w   i  t  z  e  r   l  a  n  d   U .   K .   U .  S .
80%60%40%20%0%DepositsInstitutional investorsMBSMortgage bondsOther
Source: Michael Lea, "International Comparison of Mortgage Product Offerings," Research Institute for Housing America (2010)

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