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International Mortgage Finance 101

International Mortgage Finance 101

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David Min explains that all of the world’s advanced countries provide significant levels of government guarantees to their housing finance systems.
David Min explains that all of the world’s advanced countries provide significant levels of government guarantees to their housing finance systems.

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Published by: Center for American Progress on Jun 12, 2012
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1Center for American Progress | International Mortgage Finance 101
International Mortgage Finance 101
 The United States Isn’t Alone in its Government Supportfor Housing Finance
David Min June 13, 2012
Many conservatives critical o the ederal government’s role in mortgage markets claimthe United States is unique among developed economies because it provides govern-ment guarantees or its housing nance system. Tis claim, however, is based on a un-damental misunderstanding o how other developed countries’ housing nance systemsare structured and how those countries’ governments provide guarantees to their mort-gage markets. In act, every other advanced country in the world provides signicantlevels o government guarantees to their housing nance systems, as this InternationalMortgage Finance 101 will explain.
How does the United States provide government supportfor housing finance?
Te ederal government supports housing nance primarily through backing the mort-gage securitization entities Fannie Mae, Freddie Mac, and Ginnie Mae, which togetheraccount or about 60 percent o all outstanding U.S. home loans (and about 90 percento loans originated since the 2008 nancial crisis).
Tese three institutions purchaseand pool mortgages that meet their underwriting standards and sell the cash ows romthese mortgage pools to investors in the orm o mortgage-backed securities, backed by a government guarantee.But the ederal government also supports housing nance in other important ways,including its provision o ederal deposit insurance to banks and other depository insti-tutions. Tis ederal deposit insurance—much like the ederal guarantee behind Fannie,Freddie, and Ginnie—is meant to ensure a broad, constant, and afordable supply o mortgage unding available.In act, or most o the 20th century, ederal deposit insurance was the primary way theederal government supported housing nance, as ederally insured depository institu-tions accounted or more than 70 percent o all home loans originated in the post-World War II period up until the 1980s.
2Center for American Progress | International Mortgage Finance 101
Don’t other countries do fine without government supportfor housing finance?
Many conservatives claim the United States is unique in providing government support toits mortgage nance system, noting that it is one o only a handul o countries that ofergovernment guarantees or mortgage securitization—the others being Canada, Japan, andKorea.Conservative economist Dwight Jafee, or example, claims thatEuropean coun-tries have “virtually no government role” in their housing nance systems.But this analysis ails because it ocuses myopically on the question o whether there aregovernment guarantees or mortgage securitization.Mortgage securitization is not the only way governments can support their housingnance systems, and is it not a particularly important source o mortgage unding ormost o the world. In act, the United States is the
country in the world in whichmortgage-backed securitization is the dominant source o unding or housing nance. When we look to the sources o housing nance that are actually important or mostother countries, we see that
advanced economy in the world provides explicit andimplicit government support or their housing nance system comparable to or exceed-ing the levels o government support provided in the United States.
How do other countries provide government supportfor housing finance?
Other countries do not have levels o mortgage securitization anywhere close to thato the United States. Instead they primarily rely upon banks and other deposit-takinginstitutions to make and hold loans on their balance sheets. Tese loans are nancedprimarily by deposits and, to a lesser degree, on other bank obligations called “covered bonds” (bonds that are also collateralized by mortgages held by the issuing bank).Governments o every advanced economy in the world guarantee these sources o bank nancing. Bank deposits, which und the vast majority o home loans outside the UnitedStates, are explicitly government guaranteed in every advanced economy. Covered bonds, which are also an important source o mortgage nance in Western Europe, areimplicitly guaranteed in every major European country, something analysts tasked withassessing the credit quality o these bonds universally acknowledge.

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