The Global Importance of Government Guarantees in Mortgage Finance
7 Pages Posted: 10 Jul 2012
Date Written: May 21, 2012
Critics of the federal government’s role in the mortgage markets often claim the United States is unique among developed countries in providing significant guarantees for home mortgage financing. A corollary to this critique is that European countries do not provide government guarantees for mortgage finance. Both of these statements are wrong, because they fail to understand the ways in which other countries, particularly European ones, support their residential mortgage markets.
Those who believe the United States is unique in supporting its mortgage finance system focus on the government backing of the mortgage securitization entities Fannie Mae, Freddie Mac, and Ginnie Mae, which together account for about half of all outstanding U.S. home loans (about 90 percent since the 2008 financial crisis). These three institutions purchase and pool mortgages meeting certain standards and sell the cash flows from these mortgage pools to investors in the form of mortgage-backed securities, backed by a government guarantee.
Critics of the government’s role in the U.S. housing finance market note that the United States is one of only a handful of countries that offer such guarantees for securitization — the others being Canada, Japan, and South Korea. What this argument ignores is that securitization is not an important source of mortgage finance for most of the world’s developed countries.
In Western Europe, for example, traditional bank lenders — funded by deposits and, to a lesser extent, covered bonds (a type of bond that is collateralized by mortgages held by the issuing bank) — are the primary source of residential mortgage finance. Conversely, securitization is not a major source of mortgage funding for any of these countries. Thus, it makes no sense to focus on guarantees for securitization, while ignoring guarantees for these bank obligations, when considering whether European governments provide support to their residential mortgage markets.
What does make sense is to examine the ways in which European governments do guarantee residential mortgage funding, both explicitly and implicitly. This issue brief will do just that — detailing the several ways the U.S. government guarantee on residential mortgages works and then comparing those processes with the very different but equally important government role in guaranteeing home mortgages across Europe.
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