Residential Mortgages and Public Policy: What to do with Fannie and Freddie?

• Author: James S. Sagner,David Kohn
• Date: 01 March 2016
• Published date: 01 March 2016
• DOI: http://doi.org/10.1111/basr.12084

Residential Mortgages and

Public Policy: What to do

with Fannie and Freddie?

DAVID KOHN AND JAMES S. SAGNER

ABSTRACT

The current debate on U.S. housing policy focuses on the

role of the government in supporting the mortgage mar-

ket. Existing organizations (Fannie Mae/Freddie Mac) are

in conservatorship status, and Congress is considering

alternative structures and guarantees including the

Johnson-Crapo bill, to provide catastrophic insurance in

support of the coverage from private companies. The reso-

lution of this issue is complicated by the various activities

involved in the issue—investment securities, public pol-

icy, macroeconomics, accounting, and insurance. This

article reviews the impact of these activities on U.S. hous-

ing, with a discussion of the feasibility of creating a cata-

strophic insurance program similar to that of the Federal

Deposit Insurance Corporation. The federal government

has successfully operated catastrophic insurance pro-

grams in support of private sector initiatives, and this

experience—while certainly not perfect—may be a reason-

able approach to the current Fannie/Freddie dilemma.

David Kohn is Chairman of the Accounting Department at the University of Bridgeport (CT).

E-mail: dskohn9021@aol.com. James S. Sagner is Managing Principal, Sagner/Marks Consult-

ing. E-mail: jsagner@optimum.net.

V

C2016 Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc.,

350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Business and Society Review 121:1 161–183

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INTRODUCTION

The current debate about the future of Fannie Mae and Fred-

die Mac

1

generally assumes that these two GSEs will be ter-

minated,

2

and that a new arrangement will be organized

that minimizes the supportive role of the U.S. government. The

march toward a resolution is complicated by the various activities

involved in the issue—investment securities, public policy, macro-

economics, accounting, and insurance. The recognition of the

interrelationship of these disciplines is not unusually found in the

research on the topic of the future of U.S. housing policy; most

articles deal with one focus or another without recognizing the

complexity of regulatory and academic issues.

This article reviews the impact of these activities on U.S. hous-

ing, with a discussion of the feasibility of creating a catastrophic

insurance program similar to that of the Federal Deposit Insurance

Corporation (FDIC). The federal government has successfully oper-

ated catastrophic insurance programs in support of private sector

initiatives, and this experience—while certainly not perfect—may

be a reasonable approach to the current Fannie/Freddie dilemma.

THE HISTORICAL SETTING

The genesis of the involvement of the federal government in private

housing

3

in general and the mortgage market specifically was the

Great Depression. Prior to the 1930s, banks provided most of the

financing to private homeowners through short-term loans that

were renewed periodically, usually every 5 years. Following the

stock market crash in October 1929, housing prices and the value

of nearly all assets declined as the economy fell into a severe

decline. Banks were reluctant to renew mortgage loans, even those

that were current as to principal and interest payments. To prevent

a total collapse in housing, Congress passed the National Housing

Act of 1934,

4

with Title III authorizing the creation of the Federal

National Mortgage Association (Fannie Mae).

5

A governmental

charter for the agency was established in 1938 to issue bonds to

raise funds for the purchase of qualified mortgages.

The involvement of the federal government essentially created a

secondary market for residential mortgages that did not previously

162 BUSINESS AND SOCIETY REVIEW