In a speech at the American Enterprise Institute in Washington, D.C., Board of Governors of the Federal Reserve System ("FRB") member Jerome H. Powell advocated for housing finance reform and asserted that the current system is "unsustainable."

Mr. Powell acknowledged that, while the FRB is not responsible for developing or assessing housing finance reform plans, the issue is relevant because the FRB is tasked more generally with ensuring that the financial system remains stable. This responsibility, Mr. Powell said, cannot adequately be fulfilled without a healthy housing finance system. Mr. Powell asserted that the overwhelming reliance on government backing of mortgages and the consequent heavy concentration of the securitization market leaves it vulnerable to systemic risk and taxpayer liability.

Mr. Powell pointed to the role of government sponsored enterprises ("GSEs"), including Fannie Mae and Freddie Mac, as particularly problematic to the long-term viability of the housing finance system. Fannie Mae and Freddie Mac have remained in a state of "conservatorship" since the government intervened in the wake of the 2008 financial crisis. GSEs now control about 80 percent of the purchase mortgage market, he said. The market influence of Fannie Mae and Freddie Mac presents significant risk to taxpayers, and Mr. Powell explained that "private-label securitization has dwindled to almost nothing today."

As such, Mr. Powell outlined five principles for housing finance reform:

  • implement policies to avoid future government bailouts, including modifications to catalyze an influx of private capital into the system;
  • if reforms include a government guarantee in the event of a housing crisis, the guarantee must apply to securities rather than institutions in order to avoid the possibility of a too-big-to-fail situation;
  • facilitate greater market competition to break up the GSE-dominated "duopoly";
  • consider restructuring the existing framework rather than rebuilding the entirety of the housing finance system; and
  • work towards bipartisan agreement, prioritizing necessary reforms over "holding out for the perfect answer."

Mr. Powell emphasized the urgency of finding a solution to the various potential housing finance issues:

"If Congress does not enact reforms over the next few years, we are at risk of settling for the status quo – a government-dominated mortgage market with insufficient private capital to protect taxpayers, and insufficient competition to drive innovation. There is a serious risk, if not a likelihood, that this state of affairs may persist indefinitely, leaving our housing finance system in a semi-permanent limbo."

Commentary / Steven Lofchie

Governor Powell's view seems to echo Peter Wallison's dissenting opinion in the Financial Crisis Inquiry Commission Official 2011 Final Report (at page 444). Indeed, a credit to Mr. Wallison, a Fellow at the American Enterprise Institute and a former minority member of the Commission might be in order. In any case, there is no doubt that the change in Administration has resulted in a moderate amount of rethinking of the supposed benefits of Dodd-Frank and prior regulatory policy generally, even by those who were previously complete champions. See, e.g., Federal Reserve Governor Daniel Tarullo Reconsiders the Volcker Rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.