The housing finance policy discussions continued on Capital Hill on Wednesday with a Senate Banking Committee hearing that considered international housing finance systems. The three witnesses provided explanations of what the U.S. can learn from other nations' housing finance policies. The hearing had a distinctly different flavor from an earlier one by the House Financial Services Committee, which mostly focused on the U.S. system returning to what it was before the crisis and doubling down on government reliance.

It probably isn't hard to figure out why it's important for the U.S. to revise its housing finance policy. The country is still suffering the consequences of a painful real estate bubble that government policy helped to create. But why look to other nations? The U.S. housing market has fallen further than those of other countries. To make matters worse, despite the call for expanding homeownership that helped lead to the bubble, the homeownership rate in the U.S. isn't nearly the highest. Alex Pollock, a witness who is an American Enterprise Institute fellow and was President and CEO of the Federal Home Loan Bank of Chicago for more than a decade, provides the following chart in his prepared testimony:

global home ownership rates.png

As you can see, even though the U.S. has the most government involvement in its housing market among these nations, its relatively weak homeownership rate shows that its strategy doesn't work better than those other countries employ.

Considering that the subject of this hearing was specifically geared to what other countries do well, the witnesses this time around seemed far more open to more aggressive housing finance reform. In this case, only one witness -- Wharton Business School professor Susan M. Wachter -- was unconvinced that drastic reform of how mortgages are funded is necessary. She was also the only one also testifying in the earlier House hearing. She thinks it's important to ensure that fixed rate mortgages remain the predominant product, so a government guarantee would still be necessary. The reform approach she prefers is for the government to enforce stricter underwriting requirements.

Another witness, Michael J. Lea, director of the Corky McMillin Center for Real Estate at San Diego State University, took a moderate approach. Although he doesn't want to eliminate the possibility of a government backstop for mortgages, he also believes broad financing reform would help. He wants to see more diversity in the mortgage types (fixed and adjustable) and funding sources (bondholders, banks, etc.). He envisions a market that utilizes the best aspects of other countries' systems like "Principle of Balance" approach found in Denmark, the covered bond markets in Australia and Britain, and the stricter underwriting requirements in Canada.

Further to the free market side of the spectrum was AEI's Pollock. He did not express support for a government guarantee, but instead looked to Denmark's system as "the most perfect solution in theory." In his testimony he explains the system briefly:

Explicitly governed by what it calls the "matching principle," the interest rate and prepayment characteristics of the mortgage loans being funded, which include long-term fixed rate loans, are passed entirely on to the investor in Danish mortgage bonds.

At the same time, there is a total "skin in the game" requirement for retention of credit risk by the mortgage lenders. The mortgage banks retain 100% of the credit risk of the loans, in exchange for an annual fee, thus insuring alignment of incentives for credit performance. Deficiency judgments, if foreclosure on a house does not cover the mortgage debt, are actively pursued.

Unlike Wednesday's House hearing on housing finance, the Senate's was far more productive. Witnesses debated the positive and negative features of the systems other nations use. They also considered other aspects of the U.S. mortgage market beyond just financing, like the mortgage interest rate deduction -- which all agreed fails to meaningfully broaden homeownership.

We want to hear what you think about this article. Submit a letter to the editor or write to