New at Reason: Why Ignoring Fannie Mae and Freddie Mac Reform is a Problem

In a new commentary published today at, I write that the recent Dodd-Frank Act missed a golden opportunity to reform Fannie Mae and Freddie Mac. Leaving them alone right now is just creating another housing bubble:

The financial services reforms of the Dodd-Frank Act were ostensibly aimed at many of the firms Congress sees as culprits in the financial crisis. The systemic risk oversight, trading limits, and compensation rules are largely directed at the big banks that dominate the financial industry. But with all of the focus on the banking sector, there are two gigantic subprime elephants (GSE) in the room that have gone unnoticed: Fannie Mae and Freddie Mac. The omission of Fannie and Freddie reform from the regulatory overhaul bill must be quickly resolved.

The TARP bailout gave Citigroup $45 billion, of which it has returned two-thirds. Bank of America, Wells Fargo, JPMorgan Chase, and Goldman Sachs were bailed out for $105 billion in total, which they have fully returned with $10 billion in collective profit for the government. AIG got the most, a $182.3 billion series of loans and guarantees, and it’s restructuring its whole business to return the money. As it stands now, by the end of TARP the government may not have lost any money on these particular big banks — all of which were targeted by the Dodd-Frank Act.

Yet, government-sponsored enterprises (also, GSE) Fannie and Freddie have already booked $145 billion in losses for the government, with potentially a trillion more in the future. Meanwhile, a second housing bubble is forming as the GSEs, whose business model contributed to the buildup of the last bubble, are financing 98% of the market. Furthermore, the banks would never have had the financing to get themselves in such deep toxic housing debt without the GSEs in the first place. The banking sector certainly needs a regulatory update, but why weren’t Fannie and Freddie reformed first?

Read the rest of my piece here.