Professor David Reiss, a leading expert on federal housing policy, credit rating agencies, and real estate law, has written two recent white papers about Fannie Mae, Freddie Mac, and the future of federal housing finance policy. He recommends a series of reform proposals including eliminating any future federal bailouts of Fannie and Freddie. He recently explained the reasoning for these proposals in a BLS Podcast.
He explains that since the financial crisis of 2008, these two government-sponsored enterprises have been questioned by a broad range of academics and politicians on both sides of the aisle. Now, he argues, is the time to seize the opportunity “to rethink what role we want the government to play.” The problem is that “there has been an implied guarantee that these agencies would be bailed out—and they were—to the tune of hundreds of billions of dollars,” says Reiss. In light of this, he contends that thoughtful leaders and government officials must figure out what kind of policy the country should have to prepare for when and if there is another financial crisis. In these white papers and in other venues Professor Reiss proposes new organizational structures for these agencies suggesting that they be privatized so that they can compete on an even playing field with other financial institutions.
Likewise, their public functions should be subsumed by government actors. Reiss clarifies that there is an active role for the government to play in the housing market for low and moderate-income families, and the government has the infrastructure in place to do this. For upper and middle-income households, he believes that the private sector should provide financing. Currently, both Fannie and Freddie routinely offer mortgages in excess of $1 million, which can only be obtained by the wealthiest homeowners.
In his work, Reiss suggests a regulatory theory to construct a framework for reform. He asserts that the government’s special treatment of Fannie and Freddie is an extraordinary regulatory privilege in terms of its absolute value, its impact on its competitors, and its cost to the federal government. Fannie and Freddie, he argues, have relied upon their hybrid public/private structure to obtain and protect economic rents at the expense of taxpayers and competitors. If privatization is pursued, Reiss also argues that financial regulation should be put in place to ensure liquidity during financial crises, as well as to increase consumer protection in the mortgage markets. Finally, Reiss argues that increased subsidies for affordable housing should be budgeted to meet the nation’s affordable housing goals.