In 2011, the Government Mortgage Complex accounted for 88 percent of all first-mortgage originations in the United States, with the government also controlling an estimated 90 percent of the student loan market. The government’s growing dominance in the home mortgage and student loan categories is cause for concern, posing a threat to private investors, borrowers, and taxpayers.

As policymakers continue their efforts to reduce the government’s role in the currently nationalized housing market, the broadly available and deep subsidies provided to the five divisions of the Government Mortgage Complex continue to distort the marketplace and thwart these efforts.

Few recognize just how troubled this government agency really is. When measured against the accounting system used by private mortgage insurers, the FHA is deeply insolvent, with a capital shortfall of tens of billions of dollars. If it were a private firm, state regulators would immediately shut it down. 

As the housing market struggles to keep pace with economic recovery elsewhere, homeowners would love to have a crystal ball.  Absent that, however, they have AEI resident fellow Edward Pinto, one of seven panelists to be awarded with Zillow and Pulsenomics' Crystal Ball Award.

Reform focused on sustainable lending would have FHA target a projected average claim rate of 5 per 100 insured loans under normal circumstances and 10 per 100 insured loans under stress circumstances.  This rate is about five times the normal default level for prime loans and about half the FHA's traditional default level under normal circumstances.

The federal government has taken over large swaths of consumer lending, most notably the $10 trillion home mortgage and $1 trillion student lending markets. The government's share of new loans for each now approaches 100%.Government monopolies in financial services pose risks to taxpayers as well as borrowers

Though its capital position improved slightly over last month, the FHA is still firmly in the red, with a current net worth of –$13.45 billion. Particularly alarming is the growth of the Ginnie/USDA division, which has a higher default rate than the FHA.

In this paper, I endeavor to show that continuing U.S. government involvement in the housing-finance system will inevitably involve serious losses for taxpayers and that the U.S. housing finance system could function well without GSEs or any other form of government financial support simply by ensuring that only good quality mortgages are allowed to enter the securitization system.