This Note proposes various amendments to HERA designed to prevent a repeat of the subprime crisis. First, HERA should be amended to prevent the GSEs from lobbying the executive or legislative branches of government. This will likely have the effect of increasing government control over the GSEs. And because the FHFA has already suspended the GSEs’ lobbying activity, this is not a new suggestion, but one that has already resulted in substantial positive effects.
Second, the Act should require the GSEs to focus on the core mortgage market, making affordable housing just a small part of their overall business. The GSEs should be prohibited from purchasing private label RMBS, undoubtedly the most toxic assets. The federal government should offer an explicit guarantee on mortgages backed by prime loans. Finally, there should be a definite cap on the number of affordable housing loans the GSEs can purchase. These changes will likely have the effect of stabilizing the secondary mortgage market, and of neutralizing the GSEs’ moral hazard by restricting their ability to abuse affordable housing programs for political and financial gain. Any consequential reduction in the availability of affordable loans can be addressed through other federal programs.