For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933

Article by Brent J. Horton

Despite the fact that Fannie Mae’s creation of mortgage-backed securities (MBS) played a major role in causing the 2008 financial crisis, the issue of reforming Fannie Mae’s securitization activities was ignored by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), the United States Congress’s reaction to the crisis. Former Secretary of the United States Department of the Treasury Henry Paulson said in a recent interview with the Washington Times: “It perplexes me that nothing has been done.” Paulson worries that if nothing is done, any future failure of Fannie Mae—a very real possibility absent reform—will lead to what he calls a financial “horror show” and that “the ensuing crisis [will be] much bigger than the financial collapse in the wake of the Lehman bankruptcy.” Given the urgency of the matter, it is surprising that post-2008 financial crisis scholarship—much like Congress—has largely ignored the need to reform Fannie Mae. The scholarship that does exist on the topic tends to recommend abolishing Fannie Mae (allowing the private sector to fill the hole). As such, this Article fills a major gap in the scholarly debate. This Article recognizes that Fannie Mae plays an important role in financing home ownership. As such, this Article forwards a solution that will maintain Fannie Mae but constrain its risk taking in the future. Because “[s]unlight is said to be the best of disinfectants; electric light the most efficient policeman,” this Article proposes that the best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933. Right now—as was the case in 2008—Fannie Mae only engages in ad hoc voluntary disclosure, which is void of substance and entirely inadequate given the number of investors that purchase its MBS daily.

In arguing that Fannie Mae’s MBS should be subject to the disclosure requirements of the Securities Act of 1933, this Article moves beyond the traditional justification—investor protection—and argues that disclosure can protect the taxpaying public. After all, in 2008, it was the taxpaying public that was called upon to bail out investors in Fannie Mae’s MBS. The bill was $116 billion. While subjecting Fannie Mae to the disclosure requirements of the Securities Act of 1933 to protect the taxpaying public is a novel application of the law, it is not without support. It is supported by the language of the Securities Act itself, which calls in several places for regulators to act on behalf of “the public interest.”

Requiring Fannie Mae to comply with the disclosure requirements of the Securities Act of 1933 will empower the taxpaying public, providing them with the information necessary to assess whether they will again be called upon to bail out Fannie Mae. Empowered with such information, the taxpaying public can—through their representatives in Washington—limit the amount of risk that Fannie Mae takes and take ownership of how their tax dollars are used. Consider that the $116 billion used to bail out Fannie Mae could have been used to build over one thousand very large, very well-equipped high schools.


89 Tul. L. Rev. 125 (2014)