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The Public Option in Housing Finance

63 Pages Posted: 13 Dec 2011 Last revised: 19 May 2015

Adam J. Levitin

Georgetown University Law Center

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Accounting Department

Date Written: May 13, 2013


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.

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

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: or

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)


University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States


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