Dear FSOC: Can We Finally Have a Housing Finance System That Is Stable as Well as Affordable?

The Financial Stability Oversight Council (FSOC) announced in mid-July it would at last do a review of the secondary mortgage market. For many decades, housing finance policy – going back to the early days of the Great Depression – has been focused on making mortgages available and affordable to support and expand homeownership. In the past decade, housing finance policy discussions have also been heavily focused on whether the two government-sponsored enterprises (GSEs), i.e. Freddie Mac and Fannie Mae, should continue in their current form or something different on their path to exiting conservatorship. Unfortunately, the stability of the housing finance system never quite seems to make it to the policymaker front burner – despite its having been at the heart of the two largest financial crises in the entire seventy-five years of the post-World War II era up until the pandemic hit. Even in the pandemic, the mortgage market has shown, once again but on a less dramatic scale, how prone it is to instability. In this paper, Don Layton reviews the three major financial crises since World War II, then gives specific suggestions of what the FSOC review should have as its agenda, organized by risk-type: interest rate risk, credit risk, and operating risk.