The two government-sponsored enterprises (GSEs) of Freddie Mac and Fannie Mae were placed into conservatorship (a status where they operate essentially as wards of the US government) in September 2008. Shortly thereafter, government officials and housing finance policy specialists began proposing ideas about they could be replaced. This reflected the almost-universal assumption that the two companies had so lost the confidence of the mortgage industry and the political establishment in Washington – the word “toxic” was frequently used – that they had to be “wound down” and replaced by something new, which became the official policy position of the Obama administration.

My new paper, After a Decade of Debate about the Right GSE Reform Model, We’re Down to Two Choices describes how this wind-down policy consensus, still dominant in 2014, had been turned on its head by early 2019. Specifically, the two leading proposals for reform by legislation that are now under consideration, as well as reform by administrative means, all build upon keeping the two GSEs as core to the housing finance system. This reflected, first, the failure of the policy process in Washington to come up with a credible replacement system that could garner broad support that it would work properly without inordinate risk of disruption to homeownership in America. Second, it also reflected how the major reforms of the GSEs during conservatorship directly led to them regaining the confidence of the mortgage lending industry and thereby much of the policy establishment.

The paper begins by reviewing the evolution of major ideas about how to replace the two companies, which ranged widely. Such ideas included everything from a government-owned monopoly to an industry cooperative, to having a large group of firms become competing mini-GSEs, as well as others. Most were described at a general level, without specificity. And, befitting a marketplace where the government stands behind over two-thirds of the $11 trillion of residential mortgages in the country, political ideology and special interests were a driver of these proposals as much as dispassionate and professional mortgage expertise. In fact, individuals who are ideologically very conservative called for there to be no replacement for the companies after wind-down: the free market, they claimed, would provide housing finance without inordinate disruption.

These ideas then were tested through the classic process of debate and discussion between members of the housing finance policy community and housing-related industry associations, as well as elected and appointed government officials.

The result of this process was, in 2014, a concerted effort to pass a bipartisan bill known as Corker-Warner, named for the two Senators who proposed it to the Senate Banking Committee. The bill was based upon the concept of the private sector creating many-more-than-two competing mini-GSEs to replace the duopoly of Freddie Mac and Fannie Mae, which were to be fully wound down (although their infrastructure might possibly be redeployed). It had the support of moderates in both political parties in the Committee, the Obama administration, many industry associations, and a significant number of policy specialists, but it failed to gain enough support to make it through the Senate. And, interestingly, it did not fail because of its fundamental structure, but because of strong political and policy disagreements about the depth and structure of social goals to be placed upon the two GSEs. Nevertheless, after it failed, there were quiet comments that the bill was “too complicated,” that the transition would have been very rocky, that the concept of many mini-GSEs was too dependent upon a speculative hope that such private sector companies would show up to compete, and that it posed too much risk to the economy and homeownership if they did not.

After the failure of Corker-Warner, the policy and political actors in Washington focused on other, more narrow housing issues while GSE reform was put on the back burner.

Meanwhile, starting in 2012 and 2013, the GSEs had begun a major campaign of reform under the conservatorship of the Federal Housing Finance Agency (FHFA), the regulator of the two companies. The mortgage lending industry began to see the companies become much more professional and competitive, adding technology to make the lending process faster and less expensive. The concept of credit risk transfer (CRT), pioneered by Freddie Mac, became a standard part of the GSE business model, dramatically reducing taxpayer exposure to the companies by selling off part of the risk of loss on their mortgage guarantees to private sector investors. And the extremely large investment portfolios of the two companies – which had totaled over $1.5 trillion at their peak prior to conservatorship, all funded by ultra-low-cost borrowings due to the implied guarantee of the companies by the government – were being smoothly wound down to comparatively modest levels of under $300 billion each (a process completed in 2018).

This resulted in a dramatic change over time of the mortgage lending industry’s view of the companies. And increasingly, in 2016 and later, smaller lenders (which are well-liked and thus influential in Washington) began to speak out that the future should not be based upon winding down the two GSEs but instead built upon them. Such smaller lenders, in particular, had gotten very nervous about the potential for major disruption in the transition from the traditional GSE system of housing finance to something else – since such disruption could easily put their existence at risk.

This culminated in early 2019 with the National Association of Realtors, the second-highest spending lobbying group in Washington, coming out in support of keeping the two GSEs, but regulating them as public utilities, much as electric utilities are regulated at the state level. This was supported by many mortgage industry associations, as well, and key Democrats in Congress have commented favorably about the utility concept.

This was complemented, also in early 2019, when Senator Crapo of Idaho, Chairman of the Senate Banking Committee (who is regarded as a traditional Republican), came out in favor of abandoning the wind-down policy and instead building upon the two GSEs, as proposed in his Housing Reform Outline; the Outline also looked for new entrants to come in over time to create competition. (Controversially, his proposal required the GSEs to shrink by a specific percentage by a specified date, although it was never clear how this would happen if new entrants did not actually show up.)

And those became today’s leading concepts for GSE reform – with both of them building upon the two GSEs. It represented the political rehabilitation of Freddie Mac and Fannie Mae to a degree never thought possible in 2009 through 2012.

On September 5, 2019, the Treasury, on behalf of the Trump administration, issued its proposal for housing finance reform. At its core was a variation of Senator Crapo’s Housing Reform Outline. The main difference is that the Treasury plan did not mandate the shrinkage of the GSEs, knowing this could not be assured. Instead, it called mainly for changes throughout the regulatory world to make it easier for other market players to have a level playing field to better compete against the GSEs, but did not predict how successful that would be. The proposal also called for allowing (but not requiring) other guarantors to emerge as well.

In practical terms, all the variations on four or five core concepts of how to organize housing finance, initially all designed to replace the two GSEs, had been narrowed down to two, both of which abandoned “wind down” and instead built upon the existing companies.

Meanwhile, this debate about the nature of legislation to reform the housing system was going on while the view in Washington was that such legislation was extremely unlikely, due to general partisanship and fundamental differences between the parties about the extent and nature of social obligations to be placed on the GSEs. So, the Treasury proposal for housing finance reform also gave the specifics of reform by administrative means, and the Treasury and FHFA then embarked upon implementing that administrative reform.

And by definition, reform by administrative means – with no change in legislation – builds upon the two existing GSEs. Indeed, all the forces seem to be coming together for housing finance to be GSE-based for a long time to come.