May 27, 2018

The Need for a Federal Backstop

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The Need for a Federal Backstop

Commercial’s brighter lending picture doesn’t automatically translate to the residential side.

The private mortgage-backed securities market is finally rebounding, supplying capital to real estate transactions after a long hiatus. The evidence is from the commercial side of the market, which, unlike residential, has only private capital available to it. The residential side has government-backed loan insurance via the FHA and government- backed MBS guarantees through Fannie Mae and Freddie Mac.

In the past year, the commercial MBS market roughly doubled and is projected to rise by another 20 to 30 percent this year. As a result, transactions are projected to rise by 10 to 15 percent.
The increased capital flow is a result of the improving economy, healthier banks, rising property prices, and plentiful cash flowing across the globe seeking juicier yields than those offered by government bonds.

Given this brightening picture, you might think a return to pure private capital is needed on the residential side, as some in Congress call for. But that is the wrong lesson to draw.  

Although we should celebrate the improved availability of private capital, we need to remember that the commercial MBS market had collapsed by nearly 99 percent in 2009, the year after the financial crisis, from $229 billion to $3 billion and was virtually nonexistent for three consecutive years. Had such a situation been the case on the residential side, home sales activity could have similarly crashed. Pure private capital is fickle.

Americans wisely understand that it creates dangerous uncertainty to subject the housing market to the fast-changing whims of pure private capital. That is why the National Association of REALTORS® has been a leading advocate for increased private capital but with a continued government backstop.

Americans also get that pure private- bank mortgage lending and excessive risk-taking can lead to a meltdown. Watching the Federal Deposit Insurance Corp. step in after high-flying banks collapsed during the Great Recession reminds us that the bill still falls on the taxpayer when the federal government doesn’t guarantee the mortgage loans.

Pure private capital is nice in theory, but it’s potentially devastating for home owners and taxpayers.

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