Eight years ago we went through the worst financial crisis since the Great Depression. In its wake, banking practices were reformed to prevent a similar recession in the future. However, according to some experts, these reform efforts have not changed the US housing market in a sustainable way.

Although it has been almost a decade and the economy has all but recovered, many are calling for legislators to push aside differences, analyze successes and failures since 2008, and chart a new plan for the future of US housing. Here are the keys to the debate.

Why do We Need Reform?

The housing market makes up about 20% of the economy. An accessible pathway to homeownership is, therefore, crucial to a stable economy. Reform is a complicated but necessary process. Whenever it does occur, it won?t be pretty, but the long-term viability of our economy may depend on it.

Today there are two government-sponsored enterprises (GSEs) that serve as conservators for America?s housing market. They were appointed to these positions during the worst of the financial crisis as a temporary life support. Legislators have yet to decide upon a way to replace this conservatorship with something more permanent, but they are taking steps. The most important place for them to focus their attention is the secondary mortgage market.

Secondary Mortgage Market

In today?s housing economy, individual mortgages are grouped together, sold in pools to investors, and structured into mortgage-backed securities (MBS). This process is called securitization. There are three different segments responsible for securitizing mortgage pools.

First, investors can go through government intermediaries. Through this segment, they are given a seal of approval through Ginnie Mae, the Government National Mortgage Association, that their payments will arrive on time, ensuring that this is a solid investment.

Private financial institutions also bundle mortgages together, but much more risk falls on the investors in this case. Because of a lack of anti-fraud controls, this market spiked before the financial crisis and then crashed when over 1 million Americans defaulted on their mortgages. For this reason, since 2008, the private sector of MBSs has not risen over 10%.

Finally, we have the GSE market segment, controlled by Fannie Mae and Freddie Mac, the two government agencies currently serving as conservators. They have by far the largest share of the market, which means that right now there are almost no options for an MBS through a non-government agency. For this reason, lawmakers are slowly, but surely, taking steps to reform the secondary mortgage marketplace to be independent of GSEs.

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