Housing finance reform: The path forward gets rolling

The government-sponsored housing finance companies Fannie Mae and Freddie Mac (GSEs) were rescued with large taxpayer injections of capital and placed into legal conservatorship during the financial crisis of 2008. They remain in conservatorship today, controlled on a daily basis by the Federal Housing Finance Agency (FHFA) with the Treasury Department’s legally binding agreement (PSPA) giving Treasury substantial legal authority to go along with its ownership of 79.9 percent of each companies stock. Brookings’ Center on Regulation and Markets convened a diverse group of housing finance experts to discuss the future of the GSEs. This is a recap of that conversation.

Conservatorship was never meant to be a semi-permanent state. Over the years various reform proposals have been floated, including a bipartisan effort by then Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID), based on a proposal authored by the Bipartisan Policy Center said Dennis Shea, executive director of J. Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center. This proposal garnered significant momentum but did not make it over the finish line. Despite rumors that the Trump administration would recapitalize and release the GSE’s, they passed on the opportunity to fundamentally change the situation, instead pursuing a set of more moderate reforms. Many of these reforms, put in place under former FHFA Director Mark Calabria, garnered praise from unexpected sources including Diane Yentel, president and CEO of the National Low Income Housing Coalition and the Center for Responsible Lending’s Mike Calhoun.

Calhoun, along with former bond trader Lewis Ranieri (often credited with inventing the mortgage backed security) authored a new comprehensive proposal to reform the GSEs and end the conservatorship. The Calhoun/Ranieri plan would institute a set of permanent reforms to the GSEs, ultimately releasing them back into operation to be regulated as utilities. In the process, the Treasury Department would sell off its ownership stake, freeing potentially $100 billion to be used to address affordable housing and promote homeownership, with a particular focus in addressing the persistent racial homeownership gap.

One year after announcing their plan in a paper published by Brookings, Calhoun laid out his argument for why it still makes sense today.  Calhoun cited bipartisan support for ending the conservatorship as evidenced during the recent confirmation hearing for new FHFA Director Sandra Thompson. Calhoun argued that the Treasury Department had unwound its position from multiple other companies it bailed out under the Troubled Asset Relief Program (TARP), including AIG. Under Calhoun’s plan, FHFA and Treasury would work together to cement a set of modifications that would result in the GSEs operating in a utility-like model that could not be unwound by future administrative action. FHFA would continue to regulate the GSEs after Treasury had sold off its ownership.

The sale of Treasury’s position would generate up to $100 billion, Calhoun estimates. This money could be used for a variety of housing purposes without additional Congressional action. It is unusual for the administration to be able to generate $100 billion to use without Congressional appropriations, and with President Biden’s Build Back Better initiative struggling in Congress, it is hard to see another path where federal resources of this magnitude would be dedicated to promoting affordable housing or addressing the homeownership gap. The status quo system is producing very disparate outcomes across America by race. Data shows that GSE supported loans in New York in 2020, for example, were skewed 17 to 1 for white Americans compared to Black.

Margaret Franklin, vice president at Fulcrum and also a local government official, equated Calhoun’s paper to the “blueprint for housing affordability,” emphasizing the need for action on a local level. Shea highlighted the importance of supply side constraints for affordable housing, which is often the result of local zoning regulation (for more on this see Brookings Senior Fellow Jenny Schuetz’s new book “Fixer Upper”). Yentel agreed on the need for more funding for housing, and offered the idea of distributing the new money through the existing the National Housing Trust Fund. She also stressed the importance of ensuring that some federal investment go toward aid for affordable renting housing for low-income Americans. All panelists echoed her on the importance of rental housing, highlighting the interlocking nature of housing between homeownership and rental.

Bryan Greene, vice president of policy advocacy from the National Association of Realtors agreed on the importance of a financial market utility model. He pointed out that among the congressionally chartered duties of the GSEs is closing the racial homeownership gap. If the GSEs were to be reformed administratively, without explicit legislation, he made clear the importance of endorsing a utility model.

The conversation closed with the question of whether we can afford to wait for GSE reform. Panelists agreed that urgent, bipartisan action is needed. Greene borrowed a Monty Python quote—“It’s not dead, it’s just resting,” —to highlight the opportunity to resuscitate this debate. Brookings moderator Aaron Klein quoted his former boss Treasury Secretary Tim Geithner’s favorite motto: “Plan beats no plan,” and encouraged those who think there is a better alternative to Calhoun/Ranieri’s proposal to come forward. Ultimately, the panelists agreed on the urgency of the issue and desire for action.

Coming out of the event the question remains whether Congress is capable of legislating on GSE reform absent additional crisis. Stability in housing finance is important for the economy and for American families, as for most American’s their house is the largest asset. If Congress cannot legislate, is there a path for administrative action that creates stability for the housing market, opportunity for those seeking homeownership, and garners bipartisan support? Calhoun’s plan is out there testing to see if it can thread those needles.

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.