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Housing Reform in America: How Congress Can Move Forward

January 30, 2014
Since Fannie Mae and Freddie Mac were taken under conservatorship by the U.S. government in 2008, the government-sponsored enterprises (GSEs) have been regulated by the Federal Housing Finance Agency (FHFA), which replaced the Office of Federal Housing Enterprise Oversight (OFHEO) (Swanson). Five years later, the mortgage guaranteeing agencies are still under government control. The question on many minds has been when, and how, the government will begin reform.

Author: Jonelle Lesniak (W’14)

Since Fannie Mae and Freddie Mac were taken under conservatorship by the U.S. government in 2008, the government-sponsored enterprises (GSEs) have been regulated by the Federal Housing Finance Agency (FHFA), which replaced the Office of Federal Housing Enterprise Oversight (OFHEO) (Swanson). Five years later, the mortgage guaranteeing agencies are still under government control. The question on many minds has been when, and how, the government will begin reform. Many, including Congressmen and President Obama, have called for the government to reduce its involvement in the mortgage market (Risen). This move may be more unpopular to politicians as Fannie and Freddie keep churning a profit, which started earlier this year. This month the Fannie will send $8.6 billion in profits to the Treasury, and together the GSEs have repaid approximately $185 billion of the nearly $187 billion initially channeled to them at their takeover in 2008 (McGrath). With the federal mortgage-backers bringing in heaps to Uncle Sam, will there be enough incentive for legislators to act quickly on reform legislation?

Photo of Fannie Mae Headquarters by AgnosticPreachersKid Used Under Creative Commons License

Many options have been suggested, but generally they fall into four categories – privatize the mortgage market, have it completely government-run, have a hybrid system of private and government-run agencies, or completely reinvent our housing finance system. One bipartisan bill, which Congress is holding many hearings about, is an example of a proposed reform. This past summer, Senators Bob Corker (R-TN) and Mark Warner (D-VA) introduced S. 1217 (the Housing Reform and Taxpayer Protection Act of 2013), which calls for the creation of the Federal Mortgage Insurance Corporation (FMIC) to replace FHFA in addition to a wind-down of the GSEs over 5 years, more transparency, better access to credit, and a mortgage database. Recent hearings in Congress have elicited expert suggestions on how to improve the bill, some of which include more explicit rather than implicit oversight by FMIC, not setting capital requirements in the legislation but empowering the regulator to set them, better communication with the Financial Stability Oversight Council, and more (Swanson).

In any case, these are a few things that should be part of any housing finance reform legislation. First, the role of the government and its guarantee needs to be explicit and ex ante. Relying on implicit guarantees can be dangerous, while explicit guidelines will provide stability, consistency, and market confidence (Swanson). The truth is that as long as the housing market is central to America’s economy, the government cannot and most likely will not let it fail (Levitin and Wachter). Therefore, the government needs to tell the private mortgage market exactly what it will and will not cover in a downturn in order to mitigate moral hazard by companies seeking the government’s protection.

Second, transparency and standardization need to be achieved. Susan Wachter of the Wharton School and Adam Levitin of Georgetown Law write, “Without greater standardization of mortgage products, the complexity and heterogeneity in the origination market will overwhelm the ability of investors to accurately price risk, and without greater transparency in the securitization market, observers will be unable to determine when this mispricing has occurred.” Standardizing parts of the system such as mortgage qualifications, lending standards, mortgage rates, risk-holding standards, and clear presentation of information on individual or securitized mortgage characteristics can provide for greater transparency between involved parties.

Other concerns of reform legislation are fairness and affordability. Regarding fairness, experts have said that it is crucial for small banks to have access to the secondary mortgage market, especially for banks that serve rural customers who otherwise wouldn’t have access to mortgage capital (“Senate Banking Committee Examines Role of Small Lenders”). In regard to affordability, some contend that a completely private mortgage securities market will not be able to sustain the 30-year fixed rate mortgage that makes homeownership a possibility for many Americans (“Senate Banking Committee Hearing Examines Private Mortgage”), while others argue that a private market would still be able to offer them (e.g. Sanders).

In conclusion, whatever legislation Congress and the Obama administration ultimately approve, as Susan Wachter and Adam Levitin put it, “the government role in housing finance should support sound lending, financial stability and transparency and the standardization that supports transparency” (Levitin and Wachter). The U.S. cannot afford another 2008 housing collapse, and the government should take whatever steps it can to keep it from happening again.


Levitin, Adam J., and Susan M. Wachter. “What Next for Housing Finance?”Wharton Real Estate Review 16.1: (Spring 2012). Web. 3 June 2013. <http://realestate.wharton.upenn.edu/review/index.php?article=245>, <http://

McGrath, Maggie. “Fannie Mae Sending Treasury $8.6 Billion Of Its Profit.”Forbes.com. 7 Nov. 2013. Web. 30 Nov. 2013. <http://www.forbes.com/sites/maggiemcgrath/2013/11/07/fannie-mae-sending-treasury-8-6-billion-of-its-profit/>.

Morris, Richard A. “Don’t Reform Housing Finance – Reinvent It.”Knowledge@Wharton. 21 Nov. 2013. Web. 30 Nov. 2013. <http://knowledge.wharton.upenn.edu/article/dont-reform-housing-finance-reinvent/>.

Risen, Tom. “Should Fannie Mae and Freddie Mac Go Private?” USNews.com. 14 Nov. 2013. Web. 30 Nov. 2013. <http://www.usnews.com/news/articles/2013/11/14/should-fannie-mae-and-freddie-mac-go-private>.

Sanders, Anthony B. “Housing Finance Reform: Continuation of the 30-year Fixed-Rate Mortgage.” Testimony to Senate Banking Committee. Washington, D.C. 20 Oct. 2013. <http://mercatus.org/sites/default/files/publication/Housing-Finance-Reform-Sanders-Testimony.pdf>.

“Senate Banking Committee Examines Role of Small Lenders in Housing Finance Reform.” NCSHA. 5 Nov. 2013. Web. 30 Nov. 2013. <http://www.ncsha.org/blog/senate-banking-committee-examines-role-small-lenders-housing-finance-reform>.

“Senate Banking Committee Hearing Examines Private Mortgage Finance Market.” NCSHA. 2 Oct. 2013. Web. 30 Nov. 2013. <http://www.ncsha.org/blog/senate-banking-committee-hearing-examines-private-mortgage-finance-market>.

Swanson, Jan. “FHFA Suggests Changes to Housing Finance Reform Bill.”Mortgage News Daily. 21 Nov. 2013. Web. 30 Nov. 2013. <http://www.mortgagenewsdaily.com/11212013_fhfa_gse_reform.asp>.



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