In a new study, released today, former Moody's Analytics senior director Marc Joffe and Reason Foundation director of economic research Anthony Randazzo find that the profound lack of confidence in the models used by credit rating agencies to assess residential mortgage-backed securities (RMBS) and in the rating agencies themselves is a substantial roadblock to housing recovery in America.
The new study shows that the mortgage finance market has leaned heavily on government support over the past few years. More than 90 percent of mortgages originated in 2011 were securitized by government entities using taxpayer funds to guarantee investors against default risk. The result is that U.S. taxpayers are liable for more than $5.8 trillion in mortgage credit risk.
The fact that there are still millions of homes in the foreclosure pipeline and significant household debt in the system suggests that a housing recovery is not close in the near-term. However, a conversation needs to begin now about how the private sector will regain marketshare when recovery does start to take hold. Joffe and Randazzo's paper contributes to that discussion by identifying four leading roadblocks to reform and providing several solutions to overcoming these hurdles.
Randazzo says, "The only way we will see a robust housing market in the future is with the private sector taking the lead. But that can't happen with price competition that exists in the system now or with the legal complexities surrounding mortgage-backed securities. Once those challenges are met, the question becomes how to encourage private sector investment in housing through more transparency and better risk analysis tools then are provided now by the credit rating agencies."
The Reason Foundation study and its proposed solutions are available at http://reason.org/news/show/trust-in-mortgage-backed-securities. A one-page summary is available as well as the full study.
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