Skip to main content

Main menu

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JSF
    • Editorial Board
    • Published Ahead of Print (PAP)
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

User menu

  • Sample our Content
  • Subscribe Now
  • Log in

Search

  • ADVANCED SEARCH: Discover more content by journal, author or time frame
The Journal of Structured Finance
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Sample our Content
  • Subscribe Now
  • Log in
The Journal of Structured Finance

The Journal of Structured Finance

ADVANCED SEARCH: Discover more content by journal, author or time frame

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JSF
    • Editorial Board
    • Published Ahead of Print (PAP)
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter
Article

The GSE Reform Debate: How Much Capital
Is Enough?

Laurie S. Goodman and Jun Zhu
The Journal of Structured Finance Spring 2014, 20 (1) 37-49; DOI: https://doi.org/10.3905/jsf.2014.20.1.037
Laurie S. Goodman
is the center director for the Housing Finance Policy Center at the Urban Institute in Washington, DC.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: lgoodman@urban.org
Jun Zhu
is the senior methodologist for the Housing Finance Policy Center at the Urban Institute in Washington, DC.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: jzhu@urban.org
  • Article
  • Info & Metrics
  • PDF (Subscribers Only)
Loading

Click to login and read the full article.
Don’t have access? Sign up today to begin your trial to the PMR platform 

Abstract

Over the past eight months, a broad consensus has been emerging as to what the future state of housing finance should look like. There are several plans, including the Corker–Warner bill, under which private-sector entities would continue to originate and service mortgages, with other private-sector entities providing credit enhancement for mortgage-backed securities (MBS). A public entity would be the guarantor of last resort, absorbing the catastrophic risk. The public entity would also provide the securitization platform as well as regulatory oversight. In all these plans, the government’s catastrophic coverage is meant to kick in under extraordinary circumstances; thus the amount of capital the private sector is required to invest must be sufficient to cover all but catastrophic conditions. This article demonstrates that collateral composition, house price experience, and diversification significantly affect credit risk, and thus the capital requirement. The authors’ empirical results demonstrate that 4%–5% capital would have covered Fannie Mae and Freddie Mac (the GSEs) using the 2007 experience. With the GSEs’ current book of business, that is too high, as collateral composition has changed in favor of much more pristine loans. The other important aspects of collateral composition are pool size and geographic diversity. Risk increases with smaller or less geographically diverse MBS pools. Investors are likely to be willing to take credit risk in MBS only if pools are large and geographically diverse. This will make loan-level, risk-based pricing more difficult. It is critical to calibrate the capital needs correctly; if capital requirements are too low relative to the credit risk, the catastrophic government guarantee will be invoked far more than should be the case. If capital requirements are too high, banks will respond by holding more high-quality loans in portfolio, shifting the ultimate credit risk of their lower-quality loans to the government.

  • Copyright © 2014 Urban Institute. All rights reserved. Not to be reproduced or redistributed without permission.
View Full Text

Don’t have access? Register today to begin unrestricted access to our database of research.

Log in using your username and password

Forgot your user name or password?
PreviousNext
Back to top

Explore our content to discover more relevant research

  • By topic
  • Across journals
  • From the experts
  • Monthly highlights
  • Special collections

In this issue

The Journal of Structured Finance: 20 (1)
The Journal of Structured Finance
Vol. 20, Issue 1
Spring 2014
  • Table of Contents
  • Index by author
Print
Download PDF
Article Alerts
Sign In to Email Alerts with your Email Address
Email Article

Thank you for your interest in spreading the word on The Journal of Structured Finance.

NOTE: We only request your email address so that the person you are recommending the page to knows that you wanted them to see it, and that it is not junk mail. We do not capture any email address.

Enter multiple addresses on separate lines or separate them with commas.
The GSE Reform Debate: How Much Capital Is Enough?
(Your Name) has sent you a message from The Journal of Structured Finance
(Your Name) thought you would like to see the The Journal of Structured Finance web site.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Citation Tools
The GSE Reform Debate: How Much Capital
Is Enough?
Laurie S. Goodman, Jun Zhu
The Journal of Structured Finance Apr 2014, 20 (1) 37-49; DOI: 10.3905/jsf.2014.20.1.037

Citation Manager Formats

  • BibTeX
  • Bookends
  • EasyBib
  • EndNote (tagged)
  • EndNote 8 (xml)
  • Medlars
  • Mendeley
  • Papers
  • RefWorks Tagged
  • Ref Manager
  • RIS
  • Zotero
Save To My Folders
Share
The GSE Reform Debate: How Much Capital
Is Enough?
Laurie S. Goodman, Jun Zhu
The Journal of Structured Finance Apr 2014, 20 (1) 37-49; DOI: 10.3905/jsf.2014.20.1.037
del.icio.us logo Digg logo Reddit logo Twitter logo CiteULike logo Facebook logo Google logo LinkedIn logo Mendeley logo
Tweet Widget Facebook Like LinkedIn logo

Jump to section

  • Article
    • Abstract
    • FREDDIE AND FANNIE RISK-SHARING DATA
    • COLLATERAL COMPOSITION AND HOUSING MARKET EXPERIENCE
    • DIVERSIFICATION
    • CAPITAL SIZING, ORIGINATION CHANNEL, AND COST
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

Similar Articles

Cited By...

  • Loss Severity on Residential Mortgages: Evidence from Freddie Macs Newest Data
  • Google Scholar

More in this TOC Section

  • PERSPECTIVES: CLO Credit Ratings Gone Awry
  • Editor’s Letter
  • Highlights from Global Capital
Show more Article
LONDON
One London Wall, London, EC2Y 5EA
United Kingdom
+44 207 139 1600
 
NEW YORK
41 Madison Avenue, New York, NY 10010
USA
+1 646 931 9045
pm-research@pageantmedia.com
 

Stay Connected

  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

MORE FROM PMR

  • Home
  • Awards
  • Investment Guides
  • Videos
  • About PMR

INFORMATION FOR

  • Academics
  • Agents
  • Authors
  • Content Usage Terms

GET INVOLVED

  • Advertise
  • Publish
  • Article Licensing
  • Contact Us
  • Subscribe Now
  • Log In
  • Update your profile
  • Give us your feedback

© 2021 Pageant Media Ltd | All Rights Reserved | ISSN: 1551-9783 | E-ISSN: 2374-1325

  • Site Map
  • Terms & Conditions
  • Cookies
  • Privacy Policy