News and Commentary
Since the quasi-privatization of Fannie Mae and Freddie Mac in 1968, the company’s investors and executives have longs suspected that the government would be standing ready with a bailout should the need ever arise. This implicit protection encouraged massive over-leveraging, which in turn led to the necessary bailout. Now, wanting to unwind federal conservatorship of the companies, the Trump administration suggests replacing the old implicit backstop with an explicit backstop the companies would pay for. Perhaps the best option is to phase out these companies altogether so that political considerations about expanding homeownership no longer strap people with mortgages they can not afford.
The House Financial Services Committee just approved a host of bills. One such bill is the Homebuyer Assistance Act of 2019, which seeks to make Federal Housing Administration mortgages more accessible.
New Research
This paper measures the effect of capital requirements on microfinance institutions. Looking across countries, the find that higher capital buffers are generally associated with worse performance, except for institutions with low portfolio quality where that relationship reverses.
A piece in Vox EU measures the premium banks enjoy when government guarantees lower their borrowing costs. They find that results vary widely between countries with safe versus risky government debt. When a government is not a trusted borrower, those costs transfer over to the banks they attempt to guarantee.
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