FEDERAL

Section 3: Lessons for Housing Finance Reform:
Five Years After the Federal Government’s
Takeover of Fannie Mae and Freddie Mac
Introduction
Five years have passed since the enterprises entered
conservatorships in September 2008, where they
still remain. In the meantime, Congress continues
to consider the future of the secondary mortgage
market and what, if any, role the government should
play in it. 98 As policymakers deliberate, we offer this
discussion, which draws on our experience, of three
factors that are important to a safe, stable, and liquid
mortgage market—whatever its ultimate structure. 99
• First, soundness. The recent housing crisis
has shown that, at minimum, the secondary
mortgage market needs quality underwriting,
robust risk assessment, and market-aligned
servicing.
• Second, oversight. Our work demonstrates that
effective housing finance oversight requires wellequipped
regulators to verify decision making
and to enforce compliance.
• Third, balance. Whatever the future mortgage
market’s structure, participants will have to find
a balance among interrelated laws, roles,
and practices.
Below, we discuss how these factors bear on housing
finance. Our goal is not to take sides but to provide
our stakeholders—FHFA, Congress, policymakers,
and the public—with information that will be useful
during the debate on housing finance reform.
Context: Reforms and Reformers
Historically, the enterprises have facilitated the flow
of mortgage credit by purchasing mortgages from
lenders, who, in turn, are freed up to make more
mortgage loans. 100 When the housing bubble burst,
though, the enterprises became insolvent, which
ultimately resulted in their entering conservatorships
under FHFA’s supervision. Since then, the agency has
worked to conserve and preserve their assets and to
ensure that they follow prudent business practices.
Initially, FHFA understood the conservatorships
to be temporary while, in the Acting Director’s
words, “Congress and the Administration could
figure out how best to address future reforms.” 101
As the conservatorships became more long term,
the agency advised that it would continue to guide
the enterprises to accomplish generally agreedupon
objectives—restoring their financial fitness
and reducing their market footprint—while not
precluding any of the major enterprise reform
proposals, which range from privatization to
elimination.
In July 2010, Congress responded to the nation’s
recession with Dodd-Frank. This law contains
several housing finance reforms that are intended
to address practices that contributed to the housing
boom, including reducing the risk of borrowers
defaulting. 102 It also requires MBS issuers to retain
credit risk in the assets they securitize, that is, to
keep some skin in the game. 103 Although this law
addressed some important problems that led to the
housing crisis—lenders with little to lose loaning
to borrowers with little to repay—it did not resolve
other fundamental concerns, such as the appropriate
role for the government in housing finance.
In February 2011, the Administration published
its vision of the government’s role in Reforming
America’s Housing Finance Market. In general, the
Administration argues for replacing the enterprises
with the private market as the primary source of
52 Federal Housing Finance Agency Office of Inspector General