DeMarco: Should Government Set Standards, Backstop the Market, or Continue to Issue Guarantees?
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Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) told lawmakers on Tuesday that the role of housing finance reform should be to promote the efficient provision of credit to finance mortgages for single-family and multifamily housing. Speaking at a hearing of the House Committee on Financial Services DeMarco said that an efficient market system for providing mortgage credit to homebuyers should have certain core characteristics: allowing innovation, providing consumer choice, providing consumer protection, and facilitating transparency. At the most fundamental level, the key question in housing finance reform is what, and how large, should be the role of the federal government?
DeMarco said that as an economist he would approach the issue in the context of a potential market failure which may lead the private market to produce less of, or more of, a particular good than would be economically optimal.
There are at least two potential market failures in housing finance that may lead to an under-provision of mortgage credit. If undue or unnecessary concerns about the stability and liquidity of mortgage credit prevail in a purely private market less credit will be provided than in the absence of this type of uncertainty. The government response could range from establishing standards and greater transparency; providing liquidity or credit support, or providing a government guarantee to eliminate uncertainty.
A second failure occurs when the benefits of homeownership are viewed as extending to the broader aspects of society. In such cases the market will never provide the optimal number of homeowners so government may seek to increase demand through subsidies or assistance to encourage or facilitate consumption, i.e. the mortgage interest tax deduction.