Housing Finance System Reform


The housing finance system is essential to creating a robust and competitive consumer mortgage market. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs). These are private companies that operate under a government charter in the secondary mortgage market. They buy home mortgages from primary lenders. This allows primary lenders to offer more loans, creating more mortgage credit in the economy for consumers.

The GSEs have provided housing market liquidity and stability. They also maintained a working mortgage system during the economic downturn that followed the 2008 mortgage crisis. In addition, they provided access to financing for new home purchases and refinancing so that many struggling borrowers could remain in their homes.

In 2008, Fannie Mae and Freddie Mac collapsed because of the mortgage crisis. Congress then established the Federal Housing Finance Agency (FHFA) to oversee them, among other purposes. FHFA placed Fannie Mae and Freddie Mac into conservatorship, effectively placing them under government control.

Both enterprises have decreased the total value of the loans they retain, as required by FHFA. But they still accounted for 47 percent of originations as of first quarter 2020. Federal Housing Administration and Veterans Administration loans accounted for 23 percent. Since being placed in conservatorship, the GSEs have effectively performed the functions for which they were created. Because Fannie Mae and Freddie Mac are private companies that have repaid the government for funds advanced to them during the crisis, there is much debate about how and when to end the conservatorship. As such, policymakers are considering possible reforms to the housing finance system. This is also referred to as GSE reform.

Lawmakers, industry participants, and consumer advocates agree on the need to reform the housing finance system and to address the future of the GSEs. There is no agreement, however, on how to do so.



Reform of government-sponsored enterprises

Reforms to government-sponsored enterprises (GSEs) should do the following:

  • provide enough credit to build and buy both single-family homes and multifamily buildings. There must be sufficient housing to meet the needs of the nation, including those of households with low and moderate incomes. Reforms should support access to decent, affordable rental housing. Multifamily loans should be guaranteed. Reforms should ensure consistent access to credit and liquidity and a consistent flow of credit. This credit should be appropriately priced for market risks in both good and bad times.
  • ensure the systemic stability of the housing market. This will decrease the chance of housing market crises that affect the entire financial system. Risk should be understood and allocated appropriately. Reforms should create transparency and accountability, including by promoting standardized products when possible.
  • enhance consumer protections in the mortgage market. Reforms should promote equitable and fair access for all consumers and communities. The system should promote the long-term best interests of the borrower. This includes protecting borrowers against bad actors, as well as creating default options to promote better outcomes.
  • preserve the availability of 30-year fixed-rate, penalty-free, prepayable mortgages at a reasonable cost to creditworthy borrowers.
  • ensure equal access to the secondary market for different types of financial institutions. Communities that have been historically underrepresented should have access to financial institutions and their products.
  • foster safe, affordable innovations in mortgage products. This includes reverse mortgages and residential care options that can meet a wide variety of needs for older people seeking to age in place.
  • improve oversight of credit risk across the market so fewer homeowners default on their mortgages. Regulation of credit risk should be comprehensive and robust, covering all aspects of the mortgage market, including secondary markets. Credit risk must be appropriately measured, priced, distributed, and overseen.