Seven Steps to Housing Finance Reform

The giant American housing finance sector is as important politically as it is financially, which makes it hard to reform.  From the 1980s on, it was unique in the world for its overreliance on the “government-sponsored enterprises” (“GSEs), Fannie Mae and Freddie Mac—privately owned but privileged and with “implicit” government guarantees.  According to Fannie and Freddie, their lobbyists, and members of Congress reading scripts from Fannie in its former days of power and glory, this made American housing finance “the envy of the world.”  In fact it didn’t, and the rest of the world did not experience such envy.  But Fannie and Freddie did attract investment from the rest of the world, which correctly saw them as U.S. government credit with a higher yield: this channeled the savings of thrifty Chinese and others into helping inflate American house prices into their historic bubble.  Fannie and Freddie were a highly concentrated point of systemic vulnerability.