Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists

CHAPTER 13

Federal Housing Policies and the Recent Financial Crisis

RONNIE J. PHILLIPS

Senior Fellow, Networks Financial Institute

KENNETH SPONG

Assistant Vice President and Economist, Federal Reserve Bank of Kansas City

INTRODUCTION

Since the 1930s, the U.S. government has sought to expand home ownership to a wider range of households and income groups. This objective was pursued through the creation of government lending agencies, the passage of supportive legislation by Congress, and through regulation and supervision of financial institutions. However, as a result of the recent financial crisis, the federal government's role in promoting home ownership has come under criticism. Public efforts to expand home ownership and access to housing finance put many households at substantial financial risk, and the housing collapse destroyed nearly $7 trillion in housing equity held by homeowners.

The taxpayer bailout of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac) also has many wondering whether these government-sponsored enterprises (GSEs) should continue to exist. Moreover, some have suggested that certain banking laws passed by Congress and implemented by the bank regulatory agencies contributed to the depth of the financial crisis. The boom and bust of housing prices, combined with government's involvement in the provision of mortgage credit, has thus resulted in an enormous taxpayer bailout of the financial ...