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With all the levers that are influencing the housing crisis, what role is lending playing and if lending for mortgages goes back to processes used in the 1950s, will that be the magic solution? New government leaders think so. Here, Trump's pick Mark Calabria's plan to fix housing is outlined.

President Donald Trump plans to nominate Mark Calabria to run the Federal Housing Finance Agency, which has been regulating Fannie Mae and Freddie Mac ever since the two mortgage companies were effectively nationalized in 2008. That’s important because Calabria wants to radically change America’s housing finance system.

The key thing to understand about the American residential mortgage market is that it wouldn’t exist in its current form without significant government involvement. In the 1950s, U.S. banks held about two-thirds of the country’s residential mortgages directly on their balance sheets. Another 20% were owned by life-insurance companies. Things changed because the private sector’s repeated failures at managing risk pushed the government to increasingly socialize mortgage lending.

Government-backed mortgages didn’t gain real market share until the early 1980s. Short-term interest rates were high as the Federal Reserve fought inflation, so traditional lenders were paying far more on deposits than they were earning in interest from the mortgage loans they had made back when inflation was tame.

That was unsustainable, and many smaller banks went out of business in the early 1980s as a result. Many of the rest tried to buy time to alter their business models by selling mortgages to Fannie and Freddie to package into bonds to sell to investors.

While those asset sales rarely helped those banks—the savings and loan crisis only got worse as the 1980s went on—they did cause a big shift in the ownership of the mortgage market and who would take the loss if a borrower defaulted. This was compounded by the real- estate bust and credit crunch of the early 1990s, which made lenders eager to get risk off their balance sheets. By 1994, half of all residential mortgage credit was affiliated with the government in one way or another, with just one-third at banks and none at life insurers.

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