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International Mortgage Finance 101

The United States Isn’t Alone in Its Government Support for Housing Finance

SOURCE: AP/ Manuel Balce Ceneta

While most developed countries don't mimic the United States in supporting housing finance primarily through backing the mortgage securitization entities Fannie Mae, Freddie Mac, and Ginnie Mae, those countries do have their own methods of government support for housing finance.

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Many conservatives critical of the federal government’s role in mortgage markets claim the United States is unique among developed economies because it provides government guarantees for its housing finance system. This claim, however, is based on a fundamental misunderstanding of how other developed countries’ housing finance systems are structured and how those countries’ governments provide guarantees to their mortgage markets. In fact, every other advanced country in the world provides significant levels of government guarantees to their housing finance systems, as this International Mortgage Finance 101 will explain.

How does the United States provide government support for housing finance?

The federal government supports housing finance primarily through backing the mortgage securitization entities Fannie Mae, Freddie Mac, and Ginnie Mae, which together account for about 60 percent of all outstanding U.S. home loans (and about 90 percent of loans originated since the 2008 financial crisis). These three institutions purchase and pool mortgages that meet their underwriting standards and sell the cash flows from these mortgage pools to investors in the form of mortgage-backed securities, backed by a government guarantee.

But the federal government also supports housing finance in other important ways, including its provision of federal deposit insurance to banks and other depository institutions. This federal deposit insurance—much like the federal guarantee behind Fannie, Freddie, and Ginnie—is meant to ensure a broad, constant, and affordable supply of mortgage funding available.

In fact, for most of the 20th century, federal deposit insurance was the primary way the federal government supported housing finance, as federally insured depository institutions accounted for more than 70 percent of all home loans originated in the post-World War II period up until the 1980s.

Don’t other countries do fine without government support for housing finance?

Many conservatives claim the United States is unique in providing government support to its mortgage finance system, noting that it is one of only a handful of countries that offer government guarantees for mortgage securitization—the others being Canada, Japan, and Korea. Conservative economist Dwight Jaffee, for example, claims that European countries have “virtually no government role” in their housing finance systems.

But this analysis fails because it focuses myopically on the question of whether there are government guarantees for mortgage securitization. 

Mortgage securitization is not the only way governments can support their housing finance systems, and is it not a particularly important source of mortgage funding for most of the world. In fact, the United States is the only country in the world in which mortgage-backed securitization is the dominant source of funding for housing finance.  

When we look to the sources of housing finance that are actually important for most other countries, we see that every advanced economy in the world provides explicit and implicit government support for their housing finance system comparable to or exceeding the levels of government support provided in the United States.

How do other countries provide government support for housing finance?

Other countries do not have levels of mortgage securitization anywhere close to that of the United States. Instead they primarily rely upon banks and other deposit-taking institutions to make and hold loans on their balance sheets. These loans are financed primarily by deposits and, to a lesser degree, on other bank obligations called “covered bonds” (bonds that are also collateralized by mortgages held by the issuing bank).

Governments of every advanced economy in the world guarantee these sources of bank financing. Bank deposits, which fund the vast majority of home loans outside the United States, are explicitly government guaranteed in every advanced economy. Covered bonds, which are also an important source of mortgage finance in Western Europe, are implicitly guaranteed in every major European country, something analysts tasked with assessing the credit quality of these bonds universally acknowledge.

Conclusion

Conservatives arguing that the United States is alone in providing government guarantees for its mortgage system reach this conclusion by focusing myopically on government-backed mortgage securitization and ignoring other government-backed forms of mortgage funding. When we step back and take a broader view of the housing finance systems of other countries, it becomes clear that every advanced economy in the world provides significant levels of government support for housing finance, either comparable to or exceeding the support provided by our federal government. 

David Min is Associate Director of Financial Markets Policy at the Center for American Progress.

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