Housing

William N. Goetzmann

Housing is:

• Investment asset.• Consumption good.

– Technology for living– Cultural status symbol.

• Loan security.– Mortgages.– MBS

• Physical externality in the urban fabric.

Policy

• “The President set a goal to increase the number of minority homeowners by 5.5 million families by the end of the decade…. US homeownership rate reached a record 69.2 percent in the second quarter of 2004

• “Expanding homeownership will strengthen our nation’s families and communities, strengthen our economy, and expand this country’s great middle class. Rekindling the dream of homeownership for America’s working families can prepare our nation to embrace the rich possibilities of the twenty-first century.”

• Bill Clinton, May 2, 1995

• “Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing.

• Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. By doing so, we ultimately help homeowners and renters get lower housing costs and better access to home financing. Find out more about our mission.”

What Ginnie Mae does is guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans

• “ Fannie Mae is a private, shareholder-owned company … we work with lenders to make sure they don't run out of mortgage funds.

• “In 1938, the Federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration (FHA)-insured mortgages, thereby replenishing the supply of lendable money.

• “In 1968, Fannie Mae became a private company operating with private capital on a self-sustaining basis. Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans.

• OFHEO is required by its enabling statute - The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Title XIII of PL. 102-550) - to develop and administer a quarterly risk-based capital stress test to measure the capital adequacy of Fannie Mae and Freddie Mac. In the stress test, the statute requires OFHEO to use a house price index to account for changes in the loan-to-value (LTV) ratios of mortgages held or guaranteed by Fannie Mae or Freddie Mac

How OFHEO Measures Risk

• OFHEO Indices.

• Repeat-sales.

• Refinancings as “sales”.

• Issues with measurement.

Housing Finance

• Mortgage structure.

• Refinance option.

• Securitization.

• Exposure to interest rates.– Duration– Convexity

• “Systemic” risk.

Risk News Date: 2005-04-07

• “Market Risk - Greenspan Warns Congress to Curb Fannie, Freddie Growth”, Ellen J. Silverman

• “Federal Reserve Chairman Alan Greenspan told Congress that he supports a new regulator for Fannie Mae and Freddie Mac to rein in the growth of these two mortgage lenders…

• “Fannie Mae had $875.2 billion in its mortgage portfolio in February and Freddie Mac had $654.8 billion. The companies, which sell bonds and use the proceeds to buy mortgage loans from banks, have more than $1.7 trillion of debt and their mortgage holdings have grown from a total of $136 billion in 1990. Fannie Mae is the second-largest debtor in the U.S. after the Treasury, with $911 billion outstanding.

Too Big?

• Pros and cons of agencies.

• Alternative structures.

• Risks faced by debt holder.– Interest rates.– Housing prices.

Asset Risk

• Housing as investment