The Devil's in the Tail: Residential Mortgage Finance and the U.S. Treasury

W. Scott Frame, Larry D. Wall, and Lawrence J. White
Working Paper 2012-12
August 2012

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This paper seeks to contribute to the U.S. 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 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. The expected role ranges 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 meeting specified criteria to limit taxpayer exposure.

JEL classification: G18, G28

Key words: residential mortgages, securitization, government-sponsored enterprises, housing subsidies


Lawrence White was a board member on the Federal Home Loan Bank Board from 1986 to 1989, with responsibilities that included being a board member of Freddie Mac. The authors thank Pam Frisbee for outstanding research assistance. Helpful comments on an earlier draft were provided by Mark Calabria, Andrew Davidson, Michael Fratantoni, Steve Gaenzler, Kristopher Gerardi, Patricia Mosser, Joseph Tracy, James Vickery, and seminar participants at the Atlanta Fed's 2012 Financial Markets Conference. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to W. Scott Frame, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, GA 30309-4470, 404-498-8783, scott.frame@atl.frb.org; Larry D. Wall, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, GA 30309-4470, 404-498-8937, larry.wall@atl.frb.org; or Lawrence J. White, Department of Economics, New York University, 44 West 4th Street, Room 7-65, New York, NY 10012-1126, 212-998-0880, lwhite@stern.nyu.edu.

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