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NYU Stern Faculty Offer Market-Based Solutions for Mortgage Reform in New Book

NEW YORK--(BUSINESS WIRE)--Four NYU Stern School of Business faculty propose a model of mortgage finance that shifts guarantees from the government to a fully private-based system in their new book, “Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance” (Princeton University Press, March 2011).

“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.”

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. NYU Stern authors Professors Viral Acharya, Matthew Richardson, Stijn Van Nieuwerburgh and Lawrence J. 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.

“Guaranteed to Fail” is currently available on and in bookstores.

New York University Stern School of Business is one of the nation's premier management and education research institutions, engaged in leading the dialogue between business and society. NYU Stern offers a broad portfolio of academic programs at the graduate and undergraduate levels, all of them informed and enriched by the dynamism, energy and deep resources of New York City.

Joanne Hvala, 212-998-0995

Jessica Neville, 514-840-3830