Even as the world contends with the most recent political-economic upheavals, from the aftermath of Brexit to mass migration, unfinished work remains from the 2008 global financial crisis. If left undone, the same stresses that led to the last U.S. housing crisis will continue to dog the financial system.
Eight years have passed since Congress put Fannie Mae and Freddie Mac under conservatorship controlled by the Federal Housing Financial Agency (FHFA), meant to be a temporary salve to calm the market in the immediate aftermath of the financial crisis. In 2014, legislative efforts for long-term housing finance reform gained momentum under the bi-partisan Johnson-Crapo bill, but the bill never came to a floor vote.
Now, new thinking on how to restructure the $4.5 trillion secondary mortgage market marks a growing consensus and renewed opportunity for a solution, according to a research symposium sponsored by the Penn Wharton Public Policy Initiative and the Penn Institute for Urban Research and held in June at the U.S. Capitol in Washington, D.C. The symposium examined two proposals — one from Andrew Davidson, founder and president of Andrew Davidson & Co. Inc., and one from housing finance and policy experts Jim Parrott, Lewis Ranieri, Gene Sperling, Mark Zandi and Barry Zigas.
By addressing issues that stalled legislative action in the last go-round, the two proposals move the debate forward, according to Susan Wachter, Wharton professor of Real Estate and organizer of the symposium, in a Penn Wharton Public Policy Issue Brief co-authored with Patricia McCoy, professor at the Boston College Law School. In particular, while the Johnson-Crapo bill proposed dividing Fannie and Freddie’s functions among many players to create a competitive industry, the new proposals both advocate centralizing the system. The reason: Both plans posit that large-scale efficiencies in mortgage securitization make it a natural monopoly, and any competitive market may just naturally lead again to a duopoly or oligopoly that’s too big to fail. (At present, Fannie Mae and Freddie Mac, along with Ginnie Mae, another agency owned by the U.S., either own or insure about 60% of all mortgages outstanding in the U.S.)