Recent moves by the U.S. Treasury and Federal Housing Finance Agency to revamp the bailout of Fannie Mae and Freddie Mac make it “100% clear” that the mortgage-finance behemoths are on their way out, says Jack Guttentag, an emeritus professor of finance at Wharton.
But even as the two giants are being phased out, the federal government hasn’t announced what will take their place — and that lack of a plan could make an already tight market even tougher, says Guttentag, who runs a website called The Mortgage Professor.
In a new op-ed on Knowledge at Wharton, Guttentag discusses the implications of the phase-out on the current and future housing market, and analyzes the “nil” prospects for an immediate revival of the private secondary mortgage market. He cites Denmark as an example of a place where a robust secondary market exists.
“In the Danish model, every mortgage security is a bond that is a liability of the firm issuing it. The Danish mortgage banks issue separate bonds for each type of mortgage, and if one of them experiences a high loss rate, all the resources of the bank are available to deal with it,” Guttentag writes. “There has never been a default on a Danish mortgage bond in over 200 years. During the very worst months of the financial crisis, it was business as usual in the Danish mortgage bond market. And more recently, during the worst months of the eurozone crisis, it has been business as usual in the Danish market.”
To learn more about the Danish model and what it would take to implement it in the U.S., read the full op-ed.