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.