Response: Who Should Be Providing Mortgage Credit to American Households?

Response by David Reiss

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down.

Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. Instead of merely responding to the latest proposal coming out of Washington, D.C., it is worth taking a step back to evaluate the full range of options available to us. After all, whatever course we decide upon will shape the housing market for generations to come.

In 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, Brent Horton argues, “[T]he 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.” I disagree. While disclosure obviously has an important role to play in the regulation of publicly traded companies, the problems inherent in Fannie Mae's structure are greater than those that increased disclosure can address.

Horton's article mainly addresses Fannie Mae, but my views apply equally to its sibling corporation, Freddie Mac. Fannie and Freddie are commonly referred to as government-sponsored enterprises (GSEs). They each have a dual mandate that is built into the special charters given to them by Congress. On the one hand, they are supposed to maximize shareholder value as privately owned companies. On the other, they are supposed to increase home ownership opportunities for low- and moderate-income households and residents of underserved communities. These two missions have been in tension with each other over the years. The GSE model resulted in massive losses for the two companies during the financial crisis. Taxpayers bore these losses until the housing markets recovered, lifting the GSEs along with them. In our postcrisis world, we are left with this question: what should be done with Fannie and Freddie?


89 Tul L. Rev. 181 (2014)