Finance
U.S. Housing Finance Support At A Crossroads
HENDERSON: An aerial view of homes on November 6, 2008, in Henderson, Nevada. Foreclosures that year … [+]
If the incoming Trump Administration picks up where it left off, the last unfinished business of the 2008 financial crisis may soon be addressed. That business? Reforming a housing finance system that has been stuck in a sort of high-functioning limbo for more than 16 years.
Housing received considerable attention in the recent election, but that focus was on increasing supply, lowering prices, and providing downpayment help. Absent was a discussion about the federal agencies and programs that ensure ready access to loans for homeownership.
The U.S. housing finance system has largely recovered from the 2008 financial crisis, when the housing market collapsed. Contributing factors in the years leading up to the crisis included unsustainable home price increases, relaxed lending requirements, and an influx of subprime mortgages. Loosened lending was enabled by an increasingly sophisticated set of finance tools—mortgage-backed securities and related derivative products—used by lenders and Wall Street firms. That dynamic led to an expansion of mortgage availability that drove unsustainable house price increases.[1]
Rising prices led to a belief they would continue to rise, further inflating prices. All was well until prices peaked, and then declined, as high-risk borrowers found it difficult to refinance or sell to settle mortgage debts. Falling prices accelerated as default-driven homes for sale flooded the market. Weakened mortgage lenders then began defaulting on their own lines of credit. Wall Street quickly lost its appetite for risky mortgages and credit markets began to freeze. By late 2008, the seismic impacts of the U.S. housing downturn were being felt across the global economy.
In Washington D.C., policymakers authorized and executed on a series of legislative, regulatory, and operational reforms—often intended as triage-like treatments to stabilize the system—to ensure continued strong mortgage market liquidity. A complete market meltdown was prevented.
Since then, however, the system has progressed without a cohesive and comprehensive reconsideration. Instead, mortgage guarantee agencies and government-sponsored enterprises (GSEs) have adapted their operations and processes to meet evolving market circumstances, but only on the margin. That could change if the incoming administration decides to continue efforts the first Trump Administration initiated in 2019 to overhaul the system.
Beyond addressing housing finance, there is also a need to expand the supply and affordability of housing by making it easier to provide more types of housing in places where people want to live. A common thread through the nation’s housing affordability crisis is the fact that the supply of homes built has been insufficient to keep up with demand. While a healthy finance system is critical, that alone is insufficient to expand the nation’s supply of housing to meet current and future needs. That said, the rest of this essay focuses on housing finance.
Is A Bigger FHA Here To Stay?
Many of the stabilization measures enacted in response to the 2008 crisis (such as the Troubled Assets Relief Program) were wound down as the economy recovered. But that was not the case at the Federal Housing Administration, the main U.S. agency that guarantees loans made by lenders to homebuyers. FHA dramatically expanded its role as private lending rapidly receded, precisely the countercyclical role envisioned for the agency at its founding in 1934. In fact, FHA’s market share jumped from less than 4% in 2006 to a quarter of all home purchases during the crisis.
Today, the agency continues to back mortgages at elevated, though moderated, levels. Its portfolio of loan guaranties continues to grow and, according to a 2023 report issued by Arnold Ventures (which I authored), rose 171% in inflation-adjusted terms from 2007 to 2023. While a growing portfolio poses potential risks to taxpayers, loans originated since the crisis have performed much better than those made previously. FHA has improved its lending guidelines and adopted improvements such as risk-based underwriting.
Budgetarily, FHA’s single family mortgage insurance programs were projected to result in savings each year from 2000 to 2009. Premium revenues were forecast to far exceed payments on claims. However, after the 2008 crisis, it became clear loans made in those years cost (rather than saved) billions of dollars. Making matters worse, those savings that never materialized were spent elsewhere (showing the danger of mixing cash and accrual budgeting concepts).
Since then, and even with substantial increases in lending volumes, performance has been more in line with forecasts and has, at times, exceeded expectations. Based on supplemental data contained in the 2025 Budget, increasingly reliable forecasts have reflected more in savings than were realized before the crisis. Nevertheless, risks remain that could impact taxpayers in a significant economic downturn.
But FHA’s role in the housing finance system has proven beneficial during and after the financial crisis. While there is no compelling need for reform, legislative efforts to refresh the GSEs could pull FHA (and its sister agency Ginnie Mae) into the fray to ensure roles are harmonized.
Will Fannie/Freddie Conservatorship End?
The primary function of the GSEs, Fannie Mae and Freddie Mac, is to facilitate liquidity in the U.S. mortgage finance system. They purchase home loans made by banks and other lenders—known as conforming loans since they must meet strict size and underwriting standards— and pool those loans into mortgage-backed securities, which are then sold to investors. Those securities are favored because the GSEs guarantee full principal even if the underlying mortgages default. The GSEs typically finance more than half of all mortgages originated.
The GSEs are private companies created by the U.S. government. During the financial crisis, Fannie and Freddie were placed into conservatorship by their then-newly created regulator, the Federal Housing Finance Agency. While not at that point insolvent, their earnings and capital were deteriorating as house prices fell and their capacity to absorb further losses was in doubt. A driving concern was that if they failed due to substantial defaults on their insured mortgage portfolios or an inability to issue debt to finance themselves, the crisis would have escalated dramatically.
Conservatorship is an odd legal place for any organization to reside for an extended period—with a third party (in this case FHFA) in operational control. Conservatorship was expected to last only a short time. Then-Treasury Secretary Henry Paulson dubbed the move a “time out” to give policymakers an interval to decide their future. But the GSEs have remained there for more than 16 years, with occasional changes to conservatorship terms. In recent years, the Biden Administration has shown little interest in resolving the matter.
If actions during the first Trump presidency are any indicator, the incoming administration will be more assertive in tackling the issue. A memorandum issued by President Trump on March 27, 2019, stated that “The lack of comprehensive housing finance reform since the financial crisis of 2008 has left taxpayers potentially exposed to future bailouts, and has left the Federal housing finance programs at the Department of Housing and Urban Development potentially overexposed to risk and with outdated operations.” The memo goes on to point out that reforms are needed “to reduce taxpayer risks, expand the private sector’s role, modernize government housing programs, and make sustainable home ownership for American families our benchmark of success.”
The Treasury Secretary was directed to develop a plan to end the conservatorship, facilitate competition in housing finance, operate the GSEs in a safe and sound manner, and ensure the government is properly compensated for any backing. Under the direction of then-Secretary Steven Mnuchin, Treasury published such a plan in September 2019 proposing both legislative and administrative reforms. FHFA and Treasury then began carrying out the parts of the plan that could be done administratively.
Former FHFA Director Mark Calabria wrote about those actions in his 2023 book Shelter from the Storm. Plans were being made “to bring the conservatorships to an end, restructure the balance sheets, and end the illegal line of credit, while preserving stability in the mortgage market.” But those plans were pushed until after the election to avoid any market disruptions that might occur, particularly given risks posed to the economy by the COVID-19 pandemic.
Consequently, some key actions were completed while others remained on the drawing board. The GSEs were allowed to build capital by retaining earnings and, in a related move, FHFA established a post-conservatorship minimum capital rule. The outgoing administration left a blueprint for reform to end the conservatorship, compensate taxpayers, and allow the GSEs to raise third-party capital.[2]
The Need For Congressional Action
While the new administration can take steps to reform and release the GSEs from conservatorship, a transformed and well-coordinated housing finance system will require legislative action as well. The activities of housing finance agencies like FHA and the GSEs should complement each other. Roles need to be clearly defined, overlap avoided, and taxpayer risks minimized.
The new Congress and incoming administration must explicitly determine those roles. While objectionable levels of risk have accrued in the past, the housing finance system has operated much more soundly in recent years. Legislation should be structured to lock in the operational and financial improvements since the financial crisis and to codify reforms to further strengthen the system.
The nation’s housing market depends on a robust and dynamic housing finance system. While maintaining the status quo follows a path of least political resistance, it will be interesting to see if a second Trump Administrations picks up its past pursuit of comprehensive reform.
[1] For a fuller explanation of the conditions that led to the crisis, see Subprime Mortgage Crisis, by John V. Duca, Federal Reserve Bank of Dallas, November 22, 2013.
[2] For a detailed explanation of events during and after conservatorship see: The GSE Conservatorships: Fifteen Years Old, With No End in Sight, by former Freddie Mac CEO Donald H. Layton, September 5, 2023.
Before seeking a new referendum MPS needs to rebuild trust in the community through completing state audits, putting in place controls to prevent overspending and routine reports to the public.
For MPS Superintendent Brenda Cassellius, who just wrapped up her first year leading Milwaukee’s public school system, her tenure has been punctuated by some very big numbers.
The first is $252 million. That is the amount of new spending voters narrowly approved in an April 2024 referendum to support operations in Wisconsin’s largest school district. Just months later, MPS was rocked by revelations the district was months behind in filing key financial reports to the state, which led to former Superintendent Keith Posley’s resignation.
The second is $1 billion. MPS faces a deferred maintenance backlog exceeding $1 billion. The district’s enrollment has declined 30% over the last 30 years, leaving many schools at less than 50% full. That, in part, is driving a plan to close some schools and to improve others to help lower costs.
The final is $46 million, the deficit MPS was running for the 2024-25 school year, an unexpected shortfall which has led to hundreds of staff layoffs.
Getting the district’s accounting, budgeting and financial reporting back on track has dominated Cassellius’s first year at MPS. In an April 15 interview with the Journal Sentinel’s editorial board, she talked in detail about the challenges putting that into order and progress she sees in restoring transparency into its operations.
State funding and aging buildings create budget nightmares
Cassellius says state needs to keep up its share of school funding
In an interview with the Journal Sentinel editorial board, MPS leader Brenda Cassellius says budgets and buildings are her two top worries.
Cassellius said the on-going budget crisis is her top concern. She said the state’s failure to live up to its share of funding is exacerbating MPS’ budget woes. A group of school districts, teachers and parents filed suit against the state Legislature and its Joint Finance Committee claiming the current state funding system is unconstitutional and prevents schools from meeting students’ educational needs.
Funding for special education is especially critical. About 20% of MPS students have disabilities, almost twice the share of the city’s charter schools, and the average of 14% across Wisconsin.
“What’s keeping me up now, you know, is really just the budget crisis we’re in, with not only this year but multiple years going out without additional state aid, we’ve been not getting funding for what our needs are for our students, and particularly our students with special needs,” she said.
Although the state budget increased special education funding to a 42% reimbursement rate, the actual rate has been about 35%. Another component to the budget headache is the age of MPS buildings. The average age is 85 years-old compared to 45 across the nation.
“We have just kicked this can down the curb or kicked it down the street or whatever you call it for too long. And it’s time that we really take on a serious conversation about the conditions of the learning environments in which we send our children,” she said. “Particularly in Milwaukee Public Schools, we serve the most vulnerable children. Children who have language barriers, children who have disabilities, children in high-concentrated poverty.”
What needs to happen before MPS seeks another referendum
Voters need to be comfortable MPS has made tough budget decisions
In an interview with Journal Sentinel editorial board, Brenda Cassellius said voters will need to see budget improvements before seeking more spending
Cassellius said MPS will definitely need to go back to voters for a new referendum in the future. In addition to the 2024 measure, voters approved an $87 million plan in 2020.
Before doing that, she said the district first needs to rebuild trust in the community through completing required state audits, putting into place controls to prevent overspending and routine reports to the school board and public about finances.
“I don’t think that the voters are going to want us to bring something forward until they feel comfortable that we have done the cleanup that is necessary,” she said. “And we’ve built the trust that we have the sufficient controls in place.”
In the interim, she’s hoping the state will meet its constitutional responsibility to adequately fund public schools.
“What the public expects is you know where the money is, you’re spending it as close as you can to children, you’re getting good on the promise around art, music, and PE, and the things the public said they wanted to fund,” Cassellius said. “And they want their kids to have so that they have a quality education and an excellent education in Milwaukee Public Schools, and that they had the right amount of staff that they actually need. In the school to be safe and to run a good operation.”
Rebuilding finance staff in wake of $46 million in overspending
MPS is rebuilding school finance staff in wake of reporting lapses
In an interview with the Journal Sentinel editorial board April 15, MPS superintendent discusses accountability for district’s financial problems.
The $46 million budget shortfall from the 2024-25 school year started coming into view last fall and was confirmed in mid-January. Cassellius noted that in addition to hiring a new superintendent, MPS also parted ways with its comptroller and CFO.
“We are really rebuilding the personnel and staff of the finance department. That is what’s critical, is having the right people in the right seats doing the work,” she said. “Also critical is making sure that you have the right controls in place. The audit findings found that we did not have proper controls in place and now we have those proper controls in place and when we find things we put new SOPs in place and that is what any business does.”
Identifying that shortfall, though painful, was the result of better accounting.
“Being three years behind in auditing means that you don’t have full sight on your actual revenues and expenditures. And so we have now full sight of our revenues and our expenditures and that’s why we were able to see this new deficit of $46 million,” she said. “And we still continue to work with DPI on those processes to make sure that every month we’re doing monthly to actuals and doing those accounting, reporting that to the board. In a way that is consumable to the public that they can understand.”
Jim Fitzhenry is the Ideas Lab Editor/Director of Community Engagement for the Milwaukee Journal Sentinel. Reach him at jfitzhen@gannett.com or 920-993-7154.
Property markets move in cycles, and with interest rates rising and other pressures like high fuel costs, some markets are clearly slowing down. Many first-home buyers who have only ever seen markets going up are conditioned to think that when purchasing, competition is always intense and decisions need to be made quickly.
In those times, buyers often feel they need to act fast, stretch their budget and secure a property at almost any cost. But things have definitely changed.
In a softer market, the dynamic shifts. Properties take longer to sell, competition thins, and it’s the vendors who begin to feel pressure.
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For buyers who understand how to navigate that change, the balance of power quickly moves in their favour. The opportunity is not simply to buy at a lower price. It is to negotiate from a position of strength.
If that’s you right now, these are the key skills first-home buyers need to take advantage of in softer market conditions.
The most important shift in a soft market is psychological. In a rising market, buyers often feel like they are competing for limited opportunities. In a softer market, the opposite is true. There are more properties available, fewer active buyers and less urgency overall. This gives buyers options.
When buyers understand that they are not competing with multiple parties on every property, their decision-making improves. They are more willing to walk away, compare opportunities and avoid overpaying. Negotiation strength comes from not needing to transact immediately. When that pressure is removed, buyers are able to engage more strategically.
One of the most common mistakes first-home buyers make is continuing to apply strategies that only work in rising markets. Auction urgency is a clear example. In strong markets, auctions often attract multiple bidders and create competitive tension. In softer conditions, properties are more likely to pass in, shifting the process away from a public bidding environment into a private negotiation.
This is where leverage increases.
Private negotiations allow buyers to introduce conditions that protect their position. These may include finance clauses, longer settlement periods or price adjustments based on due diligence. Opportunities that are rarely available in competitive markets become standard in softer ones.
The Board of Visitors Finance Committee met Thursday and approved a 3.6 percent average increase in tuition, a 4.8 percent average increase in meal plan costs and a 5 percent increase in the cost of double-room housing for the 2026-27 school year. The approval was unanimous amongst Board members, though some expressed resistance to the increases before voting in favor of them.
The Committee heard from Jennifer Wagner Davis, executive vice president and chief operating officer, and Donna Price Henry, chancellor of the College at Wise, about reasons for the raise in tuition and rates. According to Davis and Henry, salary increases for professors and legislation passed by the General Assembly contribute to tuition and rates increases.
The Finance Committee, chaired by Vice Rector Victoria Harker, is responsible for the University’s financial affairs and business operations, and the Committee manages the budget, tuition and student fees.
Changes in tuition vary between schools, with the School of Law seeing at most a 5.1 percent increase, the School of Engineering & Applied Science seeing at most a 3.2 percent increase and the College of Arts and Sciences seeing at most a 3.1 percent increase in tuition for the 2026-27 school year.
For the 2026-27 school year at the College at Wise, the Committee also unanimously approved a 2.5 percent average increase in tuition, a 3.8 percent increase in meal plans and a 2 percent increase in the cost of housing.
Last year, the Committee approved a 3 percent average increase in tuition, a 5.5 percent increase in meal plans and a 5.5 percent increase in the cost of housing for the University.
Davis cited increased costs as the primary reason for the approved increase in tuition. She said that the budget that could be passed by the General Assembly for June 30, 2027 through June 30, 2028 could increase professor salaries — University professors receive raises via this process. Davis said that the Senate and House of Delegates have separate proposals dealing with the pay increases that are currently unresolved, with House Bill 30 raising salaries by 2 percent and Senate Bill 30 raising salaries by 3 percent.
Davis said every percent increase in faculty salaries costs the University $15 million annually, and the Commonwealth will increase funding to the University by $1-2 million to help pay for that increase. According to Davis, the most common way to stabilize the budgetary imbalance caused by raised salaries is through tuition raises.
Beyond the increase in salary, Davis cited the minimum wage increase, inflation and Virginia Military Survivors & Dependents Education Program as increased costs to the University. VMSDEP is a program that gives education benefits to spouses and children of disabled veterans or military service members killed, missing in action or taken prisoner. Davis said that the program is “partially unfunded” and could cost the University somewhere between $3.6 to $6 million, depending on how many students qualify for the program.
Davis spoke on other contributing factors to the increase in tuition, specifically collective bargaining — which allows workers to bargain for better wages and working conditions.
“If we look at other institutions or other states that have collective bargaining, [collective bargaining] does put an upward pressure on tuition,” Davis said.
Prior to Thursday’s meeting, the Committee heard the proposal for tuition increases from Davis and Henry April 6 in a Finance Committee tuition workshop with public comment. During the tuition workshop, tuition increases ranged from 3 to 4.5 percent for the University and 2 to 3 percent for the College at Wise. Both increases approved Thursday are within the ranges originally proposed.
Meal plan costs, on average, will be increasing by 4.8 percent in the upcoming academic year. Davis said that the University has been expanding dining options with the opening of the Gaston House and new locations for the Ivy Corridor student housing that is still in progress. She also said that the University has been taking steps to increase the availability of allergen-friendly food options.
Davis shared that the 5 percent cost increase in housing is due to the expansion of student housing in the Ivy Corridor. Davis also said that there will be 3,000 new units added to the Charlottesville housing market by 2027, of which 780 beds will be for University housing. Davis said that she hopes the Ivy Corridor housing would “free up” the city housing supply by having more students live on Grounds.
Board member Amanda Pillion said she was “concerned” about how tuition increases would harm rural families — she said the constant increases in cost could make a University education out of reach for middle-income Virginians.
“This is the second governor I’ve served under. Both times I’ve heard affordability, affordability, affordability,” Pillion said. “We need to really be conscious of the fact that … there is a large group of people that [are middle-income] that these increases [in tuition and fees] are really tough for.”
The Committee also approved a renovation for The Park — an 18-acre recreational hub in North Grounds — which will cost $10 million. As part of the renovation, The Park will include a maintenance facility, storm water systems and a maintenance access route. Davis said the renovation will address safety and security issues for the 200 people that use The Park daily. According to Davis, the University will use $2 million of institutional funds and issue $8 million of debt to fund the renovation.
The Finance Committee will reconvene during the regularly scheduled June Board meetings.
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