Primer: Sharing Credit Risk
In a housing finance system that includes a government guarantee, private capital that stands in the “first loss” position plays an important role in reducing the risk of taxpayer losses. “First loss” means the private sector stands ahead of the government in guaranteeing the timely payment of principal and interest on mortgage-backed securities when borrowers default.
Primer: Secondary Market
The secondary market for mortgages plays a critical role in sustaining a healthy housing market. Few homebuyers have sufficient savings to purchase a home outright, and many need to borrow money to buy their first home or to move to another one. Without the ability to borrow against the value of the home they are purchasing, many prospective buyers would be shut out of the market.
Primer: Ginnie Mae
The Government National Mortgage Association (or Ginnie Mae) is a government corporation within the U.S. Department of Housing and Urban Development (HUD). It was established in 1968 when Fannie Mae was privatized. Its mission is to expand funding for mortgages that are insured or guaranteed by other federal agencies.
There’s no question that “put back” risk – the prospect that the GSEs will require mortgage lenders to repurchase defaulted loans even years after origination – is a major factor contributing to excessively tight credit standards that have dampened the housing market. If the goal is to improve access to mortgage credit, then clarifying and easing the rules regarding put backs is a critical step.