The Devil's in the Tail: Residential Mortgage Finance and the US Treasury

Abstract

This paper seeks to contribute to the US housing finance reform conversation by providing a critical assessment of the various types of policy proposals that have been offered. There appears to be a broad consensus to maintain explicit government guarantees for certain narrowly defined borrower populations, such as Federal Housing Administration (FHA) insurance guarantees for low- and moderate-income and first-time homebuyers. However, the expected role of the federal government in the broader housing finance system is in dispute: ranging from no role; to insuring against only extreme or tail events; to insuring against all losses.However, most proposals agree that any public insurance be priced and available only for loans that meet prespecified criteria in an effort to limit taxpayer exposure.