PROJECTHousing Finance Reform Incubator

Barry Zigas: Achieving Access and Affordability in Mortgage Finance

Desirable objectives worth pursuing when designing a durable mortgage finance system include liquidity through all business cycles, long-term fixed-rate financing for consumers who want it, transparency in pricing, security for investors, and access to capital markets funding for lenders of all sizes and types. But none of these objectives justifies federal involvement without assuring access to sustainable mortgage financing for as many creditworthy borrowers as possible in the least costly way. A balance must be found among these sometimes competing objectives that is economically sound and socially just.

Moreover, as other authors in this series have pointed out, the country’s shifting demographics will put greater pressure on the mortgage finance system to effectively serve diverse markets. Meeting this challenge is a matter of social equity and economic consequence.

Consumers will have the greatest access to credit when there is a strong, stable economy producing jobs at good wages. But the housing finance system can make a difference in such access in any economy. And no aspect of housing finance reform has proven more vexing. Over the last eight years, debates about mortgage finance reform have focused only on the market space and activities of Fannie Mae and Freddie Mac, forcing us to address this systemwide problem of access within one narrow channel.

Taking a broader view that encompasses all federal housing credit supports in the primary and secondary markets, especially Federal Housing Administration (FHA) mortgage insurance, would make this goal more manageable, reduce inconsistencies in how consumers are served, and end decades of confusing and contradictory federal policies. FHA insurance, with its existing trillion-dollar book of business and historical social mission, can break the logjam over how mortgage finance reform can most fully meet access and affordability aspirations. We should be thinking of a more fundamental shift in how to restructure mortgage finance.

A proposal I coauthored in March, which was discussed earlier in this series by Mark Zandi, allows us to break out of this unnecessarily narrow frame for tackling the issue, so that we can utilize all the federal instruments designed to assure access to affordable credit to build a system that increases access and affordability.

Our proposal would merge Fannie and Freddie into a new government-owned corporation that would share risk with private capital and provide a government guarantee of a single class of mortgage-backed securities supporting a well-defined market. This corporation would keep the 2008 Housing and Economic Recovery Act requirements of annual percent of business housing goals. It also would retain the duty-to-serve requirement for underserved markets and a 10 basis point annual fee on the guaranteed securities to finance affordable housing and community development efforts through the Housing Trust Fund, Capital Magnet Fund, and other means. The proposal would avoid private profit–public mission conflicts that existed preconservatorship and in most other proposals. It would retain strong regulatory oversight over the new merged system and allow lenders of all sizes access to it.

It would also open the door to better integrate other critical tools for expanding access to credit—such as the FHA—into a single, coherent, and effective mortgage finance system. Access to credit in the government-sponsored enterprise (GSE) market is tight, as documented by the Urban Institute’s Housing Credit Availability Index and other metrics.1 Any reform, including our proposal, would be less than a full success if it didn’t produce a better outcome. Our proposal offers an opportunity to significantly broaden how the system serves the market. Like many of the proposals suggested in this series, our proposal would require legislation. But that is part of why it can significantly improve credit accessibility.

The Old Model

Ensuring access to credit requires attention to several issues. Household formation in coming decades will be driven by a diverse population that will need measures of credit history that are more responsive to them than current measures. Lenders in the primary market must have similar incentives to serve these new households. Those incentives must be aligned with the secondary market and include requirements to offer the broadest range of products. Biases and barriers against loans with smaller balances must be addressed. Latent demand among diverse households must be stimulated, and lenders must have products and a workforce that can respond. The secondary market must provide liquidity for these products.2

But discussions of access and affordability ultimately hinge on the size of the credit box, which is governed by the credit costs of lending. High-risk assets will bring either higher fees for borrowers or lower returns for credit providers. This drives up the cost of credit, constrains access for some borrowers, and eventually closes off credit altogether. For decades, federal policy has tried to moderate this dynamic.

The GSE model has accomplished this moderation in part by taking advantage of the widely dispersed risk in the GSEs’ large risk pools in a well-defined market to use a cross-subsidy in which the best credit risks are charged a fee that helps cover the costs of high-risk loans. The potential lender or investor costs of the higher-risk loans are further mitigated through risk sharing with private mortgage insurers.

Access has also been promoted through a requirement for Fannie and Freddie to accept lower returns for products serving targeted households and meet annual housing goals determined by the Federal Housing Finance Agency. Encouraging these lower returns expands cross-subsidization’s reach, and the housing goals ensure that secondary market policies do not constrain and, importantly, encourage primary market lenders to serve creditworthy borrowers. These requirements increased Fannie and Freddie’s service to low- and moderate-income borrowers, especially in the early years after their adoption. At some point, however, the value of the cross-subsidy and coinsurance is overtaken by the costs of riskier credit and access is closed off.

Lastly, the GSEs must serve historically underserved or poorly served markets, though the requirement has not yet been put into effect. The Federal Housing Finance Agency’s recently proposed rule to implement this duty-to-serve requirement will further shape the GSEs’ approach to markets and consumers.3

But focusing on only Fannie and Freddie to increase access fails when the cross-subsidy and coinsurance reach their limit. Tremendous energy is spent debating how to move that limit some amount with higher housing goals or limits on credit insurers’ returns, but many borrowers affected by this limit move to another credit risk system and obtain a mortgage through the FHA insurance program. A debate that focuses only on outcomes in the GSE system ignores this.  A consumer who shifts from GSE credit insurance to FHA credit insurance is considered a “system fail.”4

A New Paradigm

FHA loans are securitized primarily through Ginnie Mae and over time have come to be viewed as “second-class” mortgages, somehow inferior to conventional loans. Decades of mismanagement, explicitly racist policies (abandoned decades ago), and scandals and corruption in its mortgage programs in past decades tainted FHA and contributed to its second-class reputation. In its present state, weakened by underfunding and political interference, and struggling to restore lender confidence in it as a business partner, FHA does not seem like an obvious solution.

But FHA insurance can break the logjam over how mortgage finance reform can meet access and affordability aspirations. To be sure, mortgage finance reform should not be designed around a substandard FHA. Comprehensive reform should address and fix the FHA’s flaws and strengthen its role in a cohesive system. Mortgage finance reform that focuses only on overhauling conventional market tools will miss a critical opportunity to overhaul a valuable and powerful tool for access: FHA. Our proposal suggests that the system we proposed could integrate the government’s other mortgage finance supports, including FHA and Ginnie Mae.

Whether rechartering FHA as a separate government-owned corporation, incorporating it into the unified entity we propose, or tackling some of the FHA’s features that most constrain its market responsiveness, mortgage finance reform that does not consider all federal tools will miss the mark. FHA insurance and other federal mortgage credit insurance could be an acceptable form of credit insurance for mortgage-backed securities guaranteed through the structure we propose. But our proposal also creates a larger opportunity to modernize and reform FHA and Ginnie Mae as part of a commitment to a comprehensive, stable, open, and accessible mortgage finance system, and to remove some of the operational barriers that have stopped lenders from using FHA. Without such change, FHA’s use is likely to remain constrained, its efficacy in supporting responsible credit hampered and frustration over the conventional market’s obligations continue.

Credit access would be greatly enhanced by reducing the distinction between FHA and GSE mortgages and providing a continuum of credit insurance based on loan risk. Integrating loan underwriting and pricing in our proposed model with that of FHA would enable risk factors to be priced along a continuum within the same secondary market model.5 Many if not most loans would be backed by private capital, as is the case now.  Loans for which that alone would be too costly, or for which there would be no risk takers could shift to FHA seamlessly. Primary market lenders could offer credit through the secondary market covering many factors without having to distinguish among credit insurers or securities guarantors. Borrowers could get loans with features for which they qualify and at the best price through one secondary market channel. Loan originators and brokers in the current fragmented system sometimes steer borrowers to the insurance or security combination they think will get an approval most quickly, even if it is not the best choice for the borrower. Lenders also have conscious and unconscious biases that can influence which credit insurance option they recommend and leave borrowers with mortgages less appropriate than those for which they qualify. Reducing the importance of these market actors’ influence in this area would be a welcome reform outcome.

This integration will require close attention to how to price both private and FHA mortgage insurance and to clarify intentional distinctions between them, but the system we propose would help reduce some of the distinctions that drive execution and pricing differences today.6 Other forms of credit enhancement also could and should be incorporated into an integrated system where they add value, such as lender recourse on loans they originate and securitize, innovative models through community development financial institutions, and state and local housing finance agency programs. Having one secondary market path to liquidity for all of these options would make assuring broad access more efficient.

Not every applicant can or should qualify for a mortgage in any system.7 Though more expansive than the current GSE model, our approach would also have boundaries, and some borrowers would not obtain a loan. But more borrowers would get a mortgage through the new system if comprehensive reform eliminated the dual credit market.

Mortgage finance reform discussions have failed to generate consensus assuring the widest possible access to sustainable mortgage credit at the lowest practical cost. We can resolve this impasse if we integrate all federal supports for mortgage finance into one cohesive whole.


  1. Housing Finance Policy Center, “Housing Credit Availability Index: Index for April 12, 2016,” Urban Institute, last updated April 12, 2016,

  2. Another barrier to access beyond the scope of this essay is rising rental housing costs that consume increasing amounts of household income. These high rent burdens sap households’ ability to save for a down payment and may contribute to credit problems, especially for low- and moderate-income renters. According to a recent study, “rental housing is home to a growing share of the nation’s increasingly diverse households. But even with the strong rebound in multifamily construction, tight rental markets make it difficult for low- and moderate-income renters to find housing they can afford. As a result, the number of cost-burdened renters set another record last year” (JCHS 2015).

  3. Federal Housing Finance Agency, “FHFA Issues Proposed Rule on Fannie Mae and Freddie Mac Duty to Serve Underserved Markets,” press release, December 15, 2015,

  4. For research on the interactive relationship between FHA and GSE lending, see An and Bostic (2006).

  5. This also could mitigate concerns over the procyclical nature of private credit insurance and how relying on it in a new system could constrain credit when it is most needed. By integrating FHA into the same system, its use could be easily expanded when private credit is too expensive or not available. This happened in the mortgage crisis when FHA’s market share swelled, but not in a coordinated or integrated way.

  6. See Bing Bai and Laurie Goodman, “The private mortgage insurance price reduction will pull high-quality borrowers from FHA,” Urban Wire (blog), May 2, 2016,

  7. Homeownership education and counseling can help borrowers who do not qualify for a loan get on a path to do so. Any future system should incorporate such support in as integrated a way as possible.


An, Xudong, and Raphael W. Bostic. 2006. “GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals.” The Journal of Real Estate Finance and Economics 36 (2): 207–31.

JCHS (Joint Center for Housing Studies of Harvard University). 2015. America’s Rental Housing: Expanding Options for Diverse and Growing Demand. Cambridge, MA: Harvard University.

Barry Zigas is director of housing policy at the Consumer Federation of America. He also provides strategic planning and facilitation services to nonprofit and for-profit entities through his consulting firm Zigas and Associates LLC. He worked at Fannie Mae from 1993 to 2006 as vice president and senior vice president for community lending, through which he receives retirement benefits. His responsibilities included reporting corporate and regulatory housing goals. Zigas was president of the National Low Income Housing Coalition from 1984 to 1993, where he helped develop the 1992 legislation that first established GSE housing goals and other legislation that established the HOME program and the Low Income Housing Tax Credit. He is chair of Mercy Housing Inc. and has served on the boards of the Low Income Investment Fund, Enterprise Community Partners, National Housing Trust, and the National Housing Conference. He is a member of the consumer advisory councils at Bank of America, Ocwen Financial, Chase, and the Mortgage Bankers Association. Zigas is a Phi Beta Kappa graduate of Grinnell College and a graduate of the advanced management program at the Wharton School of the University of Pennsylvania. The views in this essay are the author’s sole responsibility.

A photo of Laurie Goodman. Dark hair, glasses, bright smile.
"It is time for an open-minded look at the housing finance system and what role, if any, today’s government-sponsored enterprises might play in the future."
Tim Howard
"When invented narrative is replaced with verifiable fact, Fannie and Freddie cease to be a 'failed business model' that must be wound down and replaced; they instead become valuable resources that must be built upon and improved."
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"To address the conflict between their affordability mission and shareholder returns, the mortgage guaranty businesses should be subjected to utility-like regulation, with strict activity, leverage, and return on equity limitations."
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"At the 10% Moment, Congress should declare the senior preferred stock fully retired, as in financial substance it will have been. Simultaneously, Congress should formally designate Fannie and Freddie as systematically important financial institutions.
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"A group of us has put forward a reform proposal that addresses the system's structural problems and keeps what works."
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"The basic pillars of America’s housing finance system were enacted 80 years ago. Since then, major reconfigurations in our economy, demographic composition, and household locational preferences demand a bolder vision for housing finance in the 21st century."
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“In the aftermath of the Great Recession, the tragic loss of wealth, and the bailout of the big banks, our national government must continue to play a central role in the housing market to right previous wrongs, ensure access to all qualified borrowers, and keep the housing finance system afloat ...
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“The most critical need for multifamily is simply that policymakers pay attention to it early and plan ahead.
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We propose a spinoff of the multifamily business units of the GSEs and the formation of other new guarantors to increase access to affordable multifamily financing.
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"Consensus exists that a reformed housing finance system must protect taxpayers, emphasize the private markets, support a broad variety of housing options and remain liquid throughout an economic cycle. Surprisingly, few recognize that a proven model already exists that meets those objectives-and...
A photo of Jim Millstein outside. Dark hair, big smile, suit and tie, glasses.
"Mortgage finance reform discussions have failed to generate consensus assuring the widest possible access to sustainable mortgage credit at the lowest practical cost. We can resolve this impasse if we integrate all federal supports for mortgage finance into one cohesive whole."
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"Today’s government-centric housing finance system is an “economics free zone” indifferent to supply and demand. Composed of an alphabet soup of agencies, this system has fostered a massive liberalization of mortgage terms and provided countless trillions of dollars in lending. Yet housing has be...
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"Much of the conversation on Capitol Hill and among policy thinkers has pushed affordability and access to the back burner. We need to bring it to the forefront of the conversation. The shape and quality of housing finance reform will have repercussions in every neighborhood and community and for...
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Rodrigo Lopez and Debra Still
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Janet Murguía
"By 2020 half of all first-time homebuyers will be Latino. Without affordable access to credit for these prospective buyers, the housing market will decline, with harmful consequences on the larger economy."
Jim Parrott
"Coming out of the crisis, there was thus almost universal agreement that we should reduce our reliance on this duopoly and shift more risk into a competitive private market."
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Research Areas Housing finance
Policy Centers Housing Finance Policy Center