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Policy Options for the
Housing and Financial MarketsApril 2008
All of the years referred to in this report are calendar years.
Some of the figures use shaded vertical bars to indicate periods of recession. (A recession extends from the peak of a business cycle to its trough.)
PrefaceThe housing and financial markets are in the midst of severe adjustments. House prices are falling rapidly, and they are expected to continue to fall. Mortgage foreclosures, particularly among subprime borrowers, have risen to record levels and are still rising. The financial markets are having severe difficulties adjusting to losses on mortgage-backed assets.
In response to a request from the Chairman of the Senate Budget Committee, theCongressional Budget Office (CBO) has examined the potential role of federal institutions and federal support in resolving the difficulties in the financial and housing markets. This paper updates and expands on issues raised in a January 2008 CBO paper, Options for Responding to Short-Term Economic Weakness.
The paper was written by Kim Kowalewski, Damien Moore, and Steven Weinberg under the direction of Robert Dennis and Kim Kowalewski. Adam Weber fact-checked the paper, and Eric Miller prepared the figures. Kim Cawley, Chad Chirico, Theresa Gullo, Mark Hadley, Douglas Hamilton, Mark Lasky, Deborah Lucas, Angelo Mascaro, Susanne Mehlman, John Peterson, Marvin Phaup, David Torregrosa, Christopher Williams, and Thomas Woodward provided considerable assistance and commented on early drafts. Outside CBO, Alan Blinder of Princeton University, Douglas Elmendorf of the Brookings Institution, and Martin Feldstein of Harvard University also provided helpful comments on an early draft.
Christine Bogusz edited the paper, and Kate Kelly and Loretta Lettner proofread it. Maureen Costantino prepared the paper for publication. Lenny Skutnik printed the initial copies, Linda Schimmel handled the distribution, and Simone Thomas prepared the electronic version for CBO’s Web site.
ContentsThe Current Economic Situation
Government Actions to Support Economic Activity and Stabilize Financial Markets
Considerations for Policymakers
Federal Assistance to Participants in the Mortgage Market
3-1. Measures of the Size of the Housing Market
2-1. S&P/Case-Shiller 10-City Composite Home Price Index and Implied Values from Futures Prices
2-3. Mortgage Foreclosures Initiated
2-4. Rates on 30-Year Mortgages
2-5. Popular Adjustable-Rate-Mortgage Indexes
2-6. Inferred Prices of Subprime Mortgage Tranches
2-8. Spread Between the Three-Month Libor Rate and the Expected Federal Funds Rate
1-1. Federal Support for Housing
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