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NYU Stern Faculty Present Their New Book, Guaranteed to Fail

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The four Stern professors propose a new model of mortgage finance that shifts guarantees from the government to a fully privatized system.

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More than 200 NYU Stern students, faculty, alumni and members of the business community gathered in Paulson Auditorium to hear Professors Viral Acharya, Matthew Richardson and Lawrence White discuss their new book, Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance (Princeton University Press, March 2011), co-authored with Professor Stijn Van Niewerburgh. In their book, the four Stern professors examine the fate of government sponsored mortgage enterprises and propose a new model of mortgage finance that shifts guarantees from the government to a fully privatized system.

Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) that were originally designed to expand the dream of home ownership to millions of Americans, have cost taxpayers $150 billion to date as bad loans collapsed during the financial crisis, and the cost continues to grow. Stern Professor Acharya, Richardson, Van Nieuwerburgh and White ask, “Where is the outrage? Fannie Mae and Freddie Mac are where they are because they were run as the largest hedge fund on the planet.”

Their recommendations for reform enter the discourse as Washington policymakers consider plans to reform the mortgage finance system, a key omission from The Dodd-Frank Act.

In their new book, the four Stern authors argue that the private, not the public sector, should manage the mortgage finance system. They call for government to provide side-by-side guarantees – only in the interim – that explicitly use market-based pricing that the private guarantors set.


The NYU Stern Blueprint for Mortgage Reform

To wean the mortgage system from government guarantees – what they call putting the “genie back in the bottle” – the authors advocate a transition from a government-backed system to a private-based one. Their model empowers the private sector to decide which mortgages to guarantee, as well as to set the price. Initially, the private sector would insure a fraction (e.g., 25 percent) of these mortgage-backed securities, while the government serves as a silent partner that insures the remainder and would receive the corresponding market-based premiums. Their model limits public sector involvement to conforming, tightly underwritten mortgages; the private sector mortgage guarantors would have to be regulated and well-capitalized. With these measures in place, the market pricing of mortgage guarantees would reflect neither explicit nor implicit government guarantees, and the private sector wouldn’t be crowded out. Ultimately, the private sector would be encouraged and allowed to flourish, completing the transition.

Learn more about Guaranteed to Fail