Abstract

http://ssrn.com/abstract=1966550
 
 

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The Public Option in Housing Finance


Adam J. Levitin


Georgetown University Law Center

Susan M. Wachter


University of Pennsylvania - Wharton School, Department of Real Estate

May 13, 2013

46:4 UC Davis Law Review 1111-1173 (2013)
U of Penn, Inst for Law & Econ Research Paper 11-34
Georgetown Public Law Research Paper No. 1966550
Georgetown Law and Economics Research Paper No. 1966550

Abstract:     
The U.S. housing finance system presents a conundrum for the scholar of regulation because it defies description using the traditional regulatory vocabulary of command-and-control, taxation, subsidies, cap-and-trade permits, and litigation. Instead, since the New Deal, the housing finance market has been regulated primarily by government participation in the market through a panoply of institutions. The government’s participation in the market has shaped the nature of the products offered in the market. We term this form of regulation “public option” regulation.

This Article presents a case study of this “public option” as a regulatory mode. It explains the public option’s rise as a governmental gap-filling response to market failures. The public option, however, took on a life of its own as the federal government undertook financial innovations that the private market had eschewed, in particular the development of the “American mortgage” — a long-term, fixed-rate fully amortizing mortgage. These innovations were trend-setting and set the tone for entire housing finance market, serving as functional regulation.

The public option was never understood as a regulatory system due to its ad hoc nature. As a result, its integrity was not protected. Key parts of the system were privatized without a substitution of alternative regulatory measures. The consequence was a return to the very market failures that led to the public option in the first place, followed by another round of ad hoc public options in housing finance. This history suggests that an awareness of the public option regulatory mode in housing finance is in fact critical to its long-term success, and that the public option is a well- pedigreed regulatory mode that has historically been associated with stable housing finance markets.

Number of Pages in PDF File: 63

Keywords: Real estate, mortgage, housing market, housing finance regulation, financial regulation, government intervention, government sponsored enterprises, public good, mortgage-backed securities, securitization, Great Depression, New Deal, HOLC, Fannie Mae, FHA, Freddie Mac, Dodd-Frank Act

JEL Classification: E61, G18, H81, K23, R51

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Date posted: December 13, 2011 ; Last revised: July 31, 2013

Suggested Citation

Levitin, Adam J. and Wachter, Susan M., The Public Option in Housing Finance (May 13, 2013). 46:4 UC Davis Law Review 1111-1173 (2013); U of Penn, Inst for Law & Econ Research Paper 11-34; Georgetown Public Law Research Paper No. 1966550; Georgetown Law and Economics Research Paper No. 1966550. Available at SSRN: http://ssrn.com/abstract=1966550 or http://dx.doi.org/10.2139/ssrn.1966550

Contact Information

Adam J. Levitin
Georgetown University Law Center ( email )
600 New Jersey Avenue, NW
Washington, DC 20001
United States
Susan M. Wachter (Contact Author)
University of Pennsylvania - Wharton School, Department of Real Estate ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

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