The Secondary Mortgage Market is Boring – But also a Remarkable Tool for Radical Housing Justice & Reparations

By William Wilcox

Congress and the Biden Administration could pay hundreds of billions in reparations to Black Americans to help close the racial wealth and homeownership gaps just by reforming the mortgage industry in a way that wouldn’t cost taxpayers a dime. That’s why reforming Fannie Mae and Freddie Mac into a single government owned corporation is an important housing policy priority. The additional revenue available due to this change should then be used to provide downpayment assistance, which is a simple and proven solution to boost homeownership, to Black Americans who have been systematically discriminated against in the housing market, often by the government itself. 

There is nothing more boring than the secondary mortgage market. It is purposefully complex, arcane, and inscrutable, but it has also served as a backbone to creating housing and wealth inequality in the United States for the past eight decades. The Federal National Mortgage Association, better known as Fannie Mae, was created in 1938 to support the Federal Housing Administration (FHA) by purchasing the loans they insured and selling them to investors to allow for more mortgage lending than was possible from banks alone. However, the FHA and Veteran’s administration loans that Fannie Mae bought were restricted to whites, specifically excluding Black families. And thus in its founding, Fannie Mae served as a tool to further entrench racial exclusion of Black Americans from homeownership and generational wealth. Fannie Mae later became a private but implicitly government-backed corporation and the Federal Home Mortgage Corporation (FHMC or Freddie Mac), which offers similar services, was created in 1978. But as a result of racist and discriminatory housing practices mandated by the government, including redlining, the racial homeownership gap has continued. Today there is a 30.8% gap in homeownership rates for Black and white households, despite a uniform interest in homeownership across racial groups. 

For more than half a century, Fannie Mae and Freddie Mac operated as government sponsored enterprises (GSEs) with the implicit guarantee of the federal government. This backing became explicit in the 2008 financial crisis when Fannie Mae and Freddie Mac faltered due to risky investments and required a government bailout. The bailout eventually put both Fannie and Freddie into conservatorship under the federal government under the Federal Housing Finance Agency (FHFA). Today, FHFA remains in oversight control of them both, which presents an opportunity to better leverage the public investment in the GSEs and utilize their profits towards housing reparations. The GSEs exist only because the federal government initially created and backed them, and then later bailed them out, yet their profits have flowed into private hands for decades, by paying out dividends to stockholders and egregious compensation to executives. They have turned a healthy profit by purchasing mortgages, packaging them together as securities, and selling them to investors who make money off the interest payments. But the GSEs have only been able to do this with the backing of the U.S. government, which they received for free for more than half a century. It is time for the public investment and public risk that the GSEs have benefitted from to go towards the public good of paying housing reparations to Black Americans who were harmed by this same system. 

A wide variety of housing finance scholars including those at the Urban Institute and Harvard’s Joint Center on Housing Studies have proposed transforming the GSEs into a single government corporation. This structure would be more nimble than a government agency since it would not be bound by the same level of regulations, but it would also be more easily regulated than the current duopoly of Fannie and Freddie. This new government corporation would be able to vary its guarantee fee to offer lower interest rate loans to lower-income first time homebuyers. Having the securities issued by this new government corporation be explicitly backed by the full faith and credit of the United States government (instead of the current implicit backing) will lower the interest rates by 20 basis points (0.2%) because there would be less risk associated with the loans, since there is functionally no risk of default by the U.S. government. Of that amount, 10 basis points of which would be used to create a reinsurance fund (money to use in case there are defaults) to further insulate the taxpayers from any catastrophic losses. The remaining 10 basis points (0.1%) of interest could be used to create a reparations fund to address the historic housing discrimination that the United States government carried out against Black people. 

Given the current total amount of mortgages handled by the GSEs, this fund would generate over $200 billion in its first ten years with the amount increasing each year as 30-year mortgages are issued over time. These funds could then be distributed through a downpayment assistance program. Earlier research has estimated that even small amounts of downpayment assistance could significantly increase the percentage of renters becoming homeowners. The study estimated that 49% more Black renters would purchase a home if provided with $10,000 in downpayment assistance (in 2000 dollars, now equivalent to $15,335). That research found that the increase in first time homeowners maxed out at $20,000 in downpayment assistance, about $30,700 in today’s dollars. 

There are currently about 8.9 million Black renter households in the United States and providing each of them with an average of $30,700 in downpayment assistance would cost about $274 billion. That amount could be generated by the reparations fund in 12 years alone. The downpayment assistance could be structured as a grant like the AmeriDream program, which ran from 2003 to 2008 and provided up to $10,000 in grant downpayment assistance to eligible households. This downpayment assistance could then be paired with other low downpayment loan options (as low as 3.5%) from the Federal Housing Administration (FHA) as well as with the lower interest rate loans made by reducing the guarantee fee that could be offered by the government corporation that would replace the current GSEs. The program could also alternatively offer a larger grant more equivalent to a 20% downpayment, or $56,240 per household, given the current median national home price of $281,200. This larger downpayment would lower long-term mortgage payment amounts for households and would have a total cost closer to $500 billion, a cost the reparations fund could cover in about 16 years. 

Given the nature and magnitude of the historical wrongs carried out against Black Americans, this amount is a pittance – and other scholars put the value of slave labor alone between $5.9-14.2 trillion, which does not account for discrimination after 1860. This program could only begin to address housing discrimination for Black renters and is certainly not the whole of reparations owed. 

GSE reform provides a unique opportunity to remake the institutions that provided the backbone for housing discrimination and created the racial wealth gap. These same institutions can be transformed into a source of funding to pay reparations that will help seed Black intergenerational wealth and improve housing and community stability. The Biden Administration should work with Congress to reform the GSEs and use the resulting funds to provide downpayment assistance paired with low interest loans to grow Black homeownership as part of a reparations framework to redress housing discrimination by the United States government. 

William Wilcox is a 2020 graduate of the Goldman School of Public Policy Masters of Public Policy program where he completed his capstone about affordable housing tax-exempt bond finance policy for the San Francisco Mayor’s Office of Housing and Community Development. Prior to graduate school he worked in homeless services and eviction prevention in New York City. He now works in affordable housing finance consulting in San Francisco and is also a tenants’ rights hotline volunteer for Tenants Together, assisting tenants across California. 

The views expressed in this article do not necessarily represent those of the Berkeley Public Policy Journal, the Goldman School of Public Policy, or UC Berkeley.