PROJECTHousing Finance Reform Incubator

James H. Carr: America Needs a 21st-Century Housing Finance System

April 12, 2016

As Jim Millstein states in his earlier essay in this series, the current housing finance system is in a state of “dysfunctional limbo.” Several policy briefs and data reports by the Urban Institute support that general observation based on many indicators (Goodman et al. 2016).1 Not surprisingly, the system is most deficient in serving populations that have historically been precluded from fair and equal access to the housing finance system, namely, African Americans and Latinos. Ironically, net new household formation will be overwhelmingly nonwhite between now and 2030 (Goodman, Pendall, and Zhu 2015).

Yet the housing finance system is not only underperforming, but it is also outdated and in need of an overhaul in its mission, activities, products, and services. The basic pillars of our modern housing finance system were enacted in the 1930s during the Great Depression. Since then, there have been major shifts in the US economy, demographic composition, and spatial location of the population. These important reconfigurations in our economy and society demand greater intervention and bolder vision than simply attempting to better manage the risks posed by an underperforming and outdated system. This essay recommends transforming Fannie Mae and Freddie Mac into a new National Housing and Community Investment Corporation (NHCIC).

A Bolder Vision

Most housing finance reform proposals either ignore or only briefly mention rental housing financing. Yet, our nation is experiencing an affordable rental housing crisis. Failing to address this shortcoming of our housing finance infrastructure, while pursuing major housing finance reform, would be an important oversight.

The Housing Act of 1937 envisioned a nation in which families would pay no more than 30 percent of their income on housing (Schwartz and Wilson, n.d.). Today, nearly two-thirds of renter households pay more than 30 percent and nearly a quarter of African American and Latino renter households pay more than 50 percent of their income on shelter (Desmond 2015). In fact, the National Low Income Housing Coalition estimates “there is not a single state in the US where a minimum-wage employee can reasonably afford a one-bedroom apartment at the fair market rent.”2 A revamped housing finance system must address and solve this problem.

A severe shortage of affordable units is a key problem for the rental market. Yet, effectively addressing the rental housing supply challenge is not simple. It requires a keen understanding of housing supply-and-demand dynamics and insight into the influences of location, construction type, and available financing on rental prices because new construction can actually raise demand and further increase rents.3 Our future housing finance system must identify ways to leverage support for producing and preserving affordable rental units (Williams 2015). This would include innovative financing structures and working closely with state and local entities to remove regulatory barriers (Gibb, Maclennan, and Stephens 2015; Katz et al. 2003).

Further, over the past 80 years, the geographic preferences of American households have shifted dramatically. The current housing finance system was designed to support new construction in the suburbs. The system has few effective tools to address the challenges presented by inner-city development, particularly in older, industrial cities with large lower-income populations and many people of color.

Americans are increasingly rediscovering the attractiveness of cities, and because of that interest, many formally distressed cities are experiencing remarkable revitalization efforts. But just as the post-WWII movement of non-Hispanic white households to the suburbs excluded the equal participation of African Americans and Latinos, many impressive urban economic recoveries are, again, leaving people of color on the sidelines.

Segregationist housing policies have been replaced by discrimination based on economic capacity, which disproportionately favors non-Hispanic white households. Yet the foundation of economic disparities by race and ethnicity have at their core decades of discriminatory federal housing policies (Carr and Anacker 2015). Today, black and Latino communities across the nation are not only struggling with weak labor markets and limited job opportunities, but they are also battling to recover from the recent foreclosure crisis.

Unregulated financial exploitation during the housing bubble inflation has left many inner-city communities of color in tatters, debris fields virtually littered with foreclosed and abandoned properties. These communities do not have access to the funding or tools to help them benefit from the return-to-the-cities movement. Further, many rural communities are struggling to adequately address economic and demographic shifts within their localities. Better meeting the community-development needs of those jurisdictions is long overdue.

The new NHCIC would support the comprehensive community development that is essential to equitable urban revitalization and responsive rural investment needs. This would include comprehensive mixed-use redevelopment incorporating owner-occupied and rental housing, retail and commercial space, and the accompanying community infrastructure. This new function could be accomplished via a new generation of community-development tax credits or tax-preferred municipal bonds, direct federal loans or guarantees, or incorporating a fully developed infrastructure bank.

The ability to pursue broad-based community investment as part of its housing finance mission would enable the NHCIC to work with communities on long-term development strategies and near-term opportunities. The new community development infrastructure function would provide low-cost funding to developers who meet criteria related to local community benefits. There are many ways to design this financing vehicle, and adding this function within the new housing finance system would provide more integrated, long-term, and sustainable investments, as well as quality construction-related job growth, in many communities that need it the most. And having this function within the NHCIC is not completely new; for many years, Fannie Mae employed community-development experts who could perform many of these new functions.

Leveraging housing finance as a jobs creator is not new. The housing finance system of the past century was designed to create jobs and a nation of homeowners. The FHA and VA (Federal Housing Administration and the US Department of Veterans Affairs) housing programs helped build millions of homes and the infrastructure required by the burgeoning suburbs they created. Residents today in many of the nation’s largest, older urban centers and distressed rural areas need good jobs that could be generated by the expanded development of decent, safe, and affordable housing and its accompanying infrastructure.

Fix the Basics

The NHCIC would have as its foundation an efficient, safe, and reliably self-sustaining mortgage finance system. Before the housing market’s collapse, our housing finance system was plagued by five major deficiencies: (1) inadequate regulatory oversight, (2) misguided incentive structures, (3) inefficient leveraging of private capital and insufficient risk-sharing arrangements, (4) an unfunded explicit federal guarantee, and (5) inadequate service to diverse market segments. In addition to addressing those critical weaknesses, a further challenge going forward will be to design a new structure that ensures a smooth transition from the current operation of Fannie Mae and Freddie Mac into a new government corporation.

The core framework for basic mortgage market operations for the NHCIC could be similar to that recommended by Mark Zandi in his contribution to this series. Zandi recommends establishing a new National Mortgage Reinsurance Corporation (NMRC), and his article draws on a more detailed proposal he coauthored with Jim Parrott, Lewis Ranieri, Gene Sperling, and Barry Zigas (Parrott et al 2016). Their concept addresses the five challenges listed above and ease of implementation. As such, their framework could be the foundation for the basic mortgage market operations of the NHCIC.

Core features of the NHCIC, that draw on the basic framework of the NMRC, include merging Fannie Mae and Freddie Mac into a new government corporation (as opposed to a government agency) that would continue to perform all the basic mortgage market operations of the current government-sponsored enterprises with some key enhancements or modifications, including the following:

  • Providing an explicit federal guarantee on mortgage-backed securities

  • Maintaining catastrophic risk while transferring all noncatastrophic risk to the private sector

  • Maintaining a portfolio for distressed loans and to aggregate single- and multifamily loans for securitization (but prohibiting the use of that portfolio for investment purposes)

  • Ensuring equal access to lenders of all sizes

  • Adjusting guarantee fees in a way that enables homeownership for creditworthy, lower-income households

  • Collecting fees to support access and affordability for homeownership and rental housing

  • Maintaining the Federal Housing Finance Agency as the new corporation’s regulator

These key structural elements ensure a well-functioning mortgage market by more clearly defining the appropriate roles for private versus public capital, improving lender access to the new entity’s securitization platform, shoring up the ability for duty-to-serve requirements to be met, continuing today’s support for rental housing finance, and leveraging the best of the private sector and government with a government corporation structure.

The NHCIC would develop, pilot, and bring to scale innovative mortgage products and services. And it would have a portfolio sufficient for the corporation to pursue mortgage innovation. This expanded role for the housing finance system recognizes that all borrower groups should not be expected to equally meet the underwriting criteria for standard mortgage products. The discriminatory practices of the government housing finance institutions of the 20th century are some of the most important contributors to the racial wealth gaps in America today (Kaplan and Vallis 2007). The NHCIC’s expanded role recognizes that, as the past decade proved, encouraging financially vulnerable households to rely exclusively on private-label securitized loans for mortgage innovation can be a recipe for future financial exploitation.4

Organizations such as Self Help Credit Union and Neighborhood Assistance Corporation of America have pioneered successful mortgage loan products. The new housing finance system should work with these and other nonprofit institutions to support and bring to scale (where possible) their innovative approaches. Innovative financing models should also explore the use of shared equity loans and shared equity ownership. Finding ways to enable investors to help borrowers own a home, rather than to compete against them in the market, would better align the interests of investors, families, and communities.

Further, the NHCIC would institutionalize borrower counseling (for those who need it) as a routine service funded by mortgage transactions (Spencer 2013). Counseling can better prepare borrowers to present higher-quality loan applications to lenders (Temkin et al. 2014). Also, accurate and reliable information is essential to making good housing finance choices. More robust borrower education might be particularly valuable to lower-income families and people of color because they are more likely to be vulnerable to financial predators and less likely to be familiar with the mortgage finance process. And given the challenges faced by young adults with low-wage jobs and high student debts, formalized borrower counseling might, nevertheless, help those households access homeownership.

The NHCIC would also be required to use the most up-to-date and predictive credit-scoring technologies. Using outdated credit-scoring models can unfairly deny households from homeownership to the extent that more accurate scoring models would have demonstrated a higher credit rating. Discussion about updating the credit-scoring models that lenders at Fannie Mae and Freddie Mac use have been under way for more than a year. There is no need to wait for the enactment of a new housing finance system for Fannie Mae and Freddie Mac to incorporate this recommendation.

This bolder vision for a 21st-century housing finance system that includes broader tools and expanded mission may, at first, seem unrealistic. But it’s useful to remember that from 1934 to 1938, the federal government created the Federal Housing Administration, Home Owners’ Loan Corporation, Federal Home Loan Bank System, and Fannie Mae. And that was in an era that predates supercomputers, data warehouses, sophisticated mathematical modeling, a wide range of risk-sharing options, and access to global capital markets. It’s inconceivable that we lack the expertise or knowledge to add a broader community infrastructure investment component to a system that has operated for more than 80 years.


  1. Laurie Goodman, Jun Zhu, and Taz George, “Four million mortgage loans missing from 2009 to 2013 due to tight credit standards,” Urban Wire (blog), April 2, 2015,

  2. Kyle Jaeger, “The US has an affordable housing crisis,” Business Insider, January 3, 2016,

  3. Rick Jacobus, “Why We Must Build,” National Housing Institute, March 9, 2016,

  4. John Dunbar and David Donald, “The roots of the financial crisis: Who is to blame?” The Center for Public Integrity, May 6, 2009,


Carr, James H., and Katrin B. Anacker. 2015. “The Complex History of the Federal Housing Administration: Building Wealth, Promoting Segregation, and Rescuing the U.S. Housing Market and the Economy.” Banking and Financial Services Policy Report 34 (8): 10–18.

Desmond, Matthew. 2015. “Unaffordable America: Poverty, housing, and eviction.” Madison, WI: Institute for Research on Poverty.

Gibb, Kenneth, Duncan Maclennan, and Mark Stephens. 2013. Innovative Financing of Affordable Housing: International and UK Perspectives. York, UK: Joseph Rowntree Foundation.

Goodman, Laurie, Rolf Pendall, and Jun Zhu. 2015. Headship and Homeownership: What Does the Future Hold? Washington, DC: Urban Institute.

Goodman, Laurie, Ellen Seidman, Jim Parrott, Sheryl Pardo, Jun Zhu, Wei Li, Bing Bai, Karan Kaul, Maia Woluchem, Alyssa Webb, and Alison Rincon. 2016. Housing Finance at a Glance: A Monthly Chartbook, March 2016. Washington, DC: Urban Institute.

Kaplan, Jonathan, and Andrew Valls. 2007. “Housing Discrimination as a Basis for Black Reparations.” Public Affairs Quarterly 21 (3): 255–73.

Katz, Bruce, Margery Austin Turner, Karen Destorel Brown, Mary Cunningham, and Noah Sawyer. 2003. Rethinking Local Affordable Housing Strategies: Lessons from 70 Years of Policy and Practice. Washington, DC: Brookings Institution and Urban Institute.

Parrott, Jim, Lewis Ranieri, Gene Sperling, Mark Zandi, and Barry Zigas. 2016. “A More Promising Road to GSE Reform." New York: Moody’s Analytics.

Schwartz, Mary, and Ellen Wilson. n.d. “Who Can Afford to Live in a Home? A look at data from the 2006 American Community Survey.” Washington, DC: US Census Bureau.

Spencer, Gene. 2013. “Integrating Housing Counseling into the Residential Marketplace: A Strategic Framework for Bolstering Homeownership; Lowering the Risk to the Housing Finance System, and Creating Sustainable Funding.” Working paper. Washington, DC: Homeownership Preservation Foundation.

Temkin, Kenneth M., Neil S. Mayer, Charles A. Calhoun, and Peter A. Tatian. 2014. National Foreclosure Mitigation Counseling Program Evaluation: Final Report, Rounds 3 through 5. Washington, DC: Urban Institute.

Williams, Stockton. 2015. Preserving Multifamily Workforce and Affordable Housing: New Approaches for Investing in a Vital National Asset. Washington, DC: Urban Land Institute.

Jim Carr is the Coleman A. Young endowed chair and professor in urban affairs at Wayne State University and a visiting fellow with the Roosevelt Institute in New York, NY. He is also a consultant to VantageScore, board member to the National Homeownership Preservation Foundation, and former executive with Fannie Mae.


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."
A photo of Jim Millstein. White hair, slight smile, suit and tie.
"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."
A photo of Alex Pollock. Slight smile, suit and tie.
"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.
A photo of Mark Zandi. Slight smile, suit, brown hair.
"A group of us has put forward a reform proposal that addresses the system's structural problems and keeps what works."
A photo of James Carr. Severe smile, suit, dark hair.
"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."
A photo of Andrew Davidson. Slgiht smile, greying hair, glasses.
"A realistic approach to GSE reform is to strip the GSEs down to the functions that promote standardization, liquidity, and access to credit, and adopt the best governance structures for those functions. This can be achieved in four steps: streamline, share risk, wrap, and mutualize."
A photo of Mark Calabria. Slight smile, suit, dark hair, glasses.
“Mortgages, under any system, have to rest on someone’s balance sheet. Like water running downhill, the risk has flowed to the most leveraged sectors of our financial system. This is a recipe for instability.”
A photo of Patricia Mosser. Dark hair, glasses, bright smile.
“The characteristics of mutuals that may be seen as disadvantages for some types of financial companies are in fact advantages for our financial market utility proposal because they align the utility’s incentives with other actors in the securitization chain.”
A photo of Marc Morial. Big smile, suit, dark hair.
“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 ...
A photo of Laurie Goodman. Dark hair, glasses, bright smile.
"Between now and 2030, this country will face an unprecedented surge in rental housing demand. Already, rents are skyrocketing out of the reach for many families, especially in places with job opportunities. New multifamily housing construction is at its highest level since the 1986 Tax Refo...
A photo of three individuals. All three are smiling, have suits, ties, and dark hair.
"There will be nuanced demands coming from the high concentration of household formation in African American, Asian, and Hispanic communities. Ginnie Mae 2.0 looks to be the safest way to build a sustainable platform to bring proven market stability to meet the needs of a materially changing demo...
A photo of two individuals. Both are smiling, have suits, ties, and glasses.
“The most critical need for multifamily is simply that policymakers pay attention to it early and plan ahead.
A photo of two individuals. Both are smiling, have suits, ties, and glasses.
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.
A photo of two individuals. Both are smiling, have suits, and ties.
"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."
A photo of Pinto. White hair, glasses, slight smile, suit.
"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...
A photo of Taylor. White hair, suit.
"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...
Mike Calhoun and Sarah Wolff
"Average price estimates obscure significant variation. To assess access and affordability, we need to look closely at differential prices, not just overall prices or prices for low–credit risk profiles."
Rodrigo Lopez and Debra Still
"We believe that all housing needs, from the most directly-subsidized, affordable rental housing to the prime jumbo single-family lending market, lie along a single continuum. This housing continuum can be best served only by addressing single-family and multifamily, rental and homeownership, gov...
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