From its beginnings in 1932, the U.S. system of support for housing finance has been rooted in a unique blend of public and private participation. A combination of direct federal subsidies, tax expenditures, explicit guarantees, support for publicly-chartered, privately-owned corporations, and broad regulatory oversight of the primary markets carried the system for more than 70 years through a variety of economic and political circumstances.
The financial crisis that began in 2007 with the collapse of the subprime market has thrown many of the assumptions underlying this structure into doubt. The government’s duty to stand behind large institutions whose size created systemic risks has been redefined. The roles of public and private interests in creating, stewarding and ultimately resolving financial investments for housing have shifted dramatically. While new roles have been adopted to meet shifting circumstances, views of how a long-term system should be structured in the wake of the meltdown are still evolving.
This paper reviews the history of Fannie Mae and Freddie Mac, examines the essential functions these entities performed, and analyzes a variety of potential new structures that might be adopted after their takeover by the federal government. It starts from the assumption that the federal government has an affirmative and important role to play in shaping and supporting a national housing policy. It endorses the importance of a broad policy framework that includes homeownership and rental housing, and single family as well as multifamily properties. It supports the notion that the national government has an abiding interest in assuring a steady flow of credit into the mortgage market. The paper assumes also that the current crisis has conclusively demonstrated the need for national regulation of mortgage origination and securitization practices to eliminate the worst predations that set off the conflagration that has overtaken the mortgage market.
This paper assumes that access to long-term, fixed-rate mortgages for both rental and homeownership is a specific and valuable goal of public policy. The presence of these instruments in the U.S. mortgage market has been one of its distinguishing characteristics compared with others around the globe. This distinction is the result of a series of federal policies, most notably FHA and the government sponsored housing enterprises (GSEs).
There are many potential ways these objectives – long-term, fixed-rate financing in a stable system that provides financing through varying economic conditions for both homeownership and rental housing, in both single-family and in multifamily properties – could be achieved. There are five fundamental questions that any new system of housing finance must be able to answer:
- Will it support the availability of long-term, fixed rate mortgages for consumers?
- Will it offer access to capital by as wide a variety of institutions as possible, from small community banks to large money center institutions?
- Will it foster and spread innovation in mortgage products to insure that helpful and sound new products can be made available widely in the marketplace?
- Will it fulfill a significant duty to serve underserved populations and communities?
- Will it provide financing both for affordable single family homeownership and rental housing?
This paper reviews a number of potential structures and analyzes their relative and respective strengths and weaknesses. The paper also assesses the value of the different functions – securitization and portfolio lending – that have characterized the GSEs’ business models. Whatever one of these models, or combination of these models, emerges from the wreckage of the “old financial order,” it seems certain that the future mortgage finance system will look very different from the one that emerged from the last great financial crisis in 1934.