As government officials quietly hollow out the essence of Fannie Mae and Freddie Mac with schemes such as risk sharing and the creation of the common securitization platform (CSP), the Federal Housing Finance Agency is also continuing to enhance the duty-to-serve requirements of the government sponsored enterprises (GSEs). This somewhat incoherent approach to the GSEs’ future underscores the need for a comprehensive and fully-informed approach to housing finance reform.
For three generations, Fannie and Freddie have served the vital function of creating market stability and liquidity in mortgage lending. More than that, they have the statutory mandate to play a lead role in improving the distribution of mortgage financing for very low-, low-, and moderate-income families in three specified underserved markets: manufactured housing, affordable housing preservation, and rural housing. These duties were spelled out in the Housing and Economic Recovery Act of 2008 (HERA). However, it was not until December 2015 that the Federal Housing Finance Agency (FHFA) got around to issuing a proposed rule that would implement “Duty to Serve” provisions.
In an update last week, FHFA reported on its outreach to obtain public input on the proposed rule. FHFA held several webinars and roundtable meetings this spring to notify interested stakeholders of the proposed rule and to provide them with an overview of its key provisions. FHFA received more than 1,500 public comments by the March 17, 2016 deadline and FHFA staff are now reviewing these comments and working to develop a final rule.
That is all well and good were these efforts not being undertaken in the context of a systematic depletion of the GSEs’ capital and mandatory risk-sharing transactions that are unloading Fannie and Freddie’s portfolios on the private sector, not to mention the determined efforts by Sen. Bob Corker, R-TN, and others to make sure the de facto winding down of the GSEs continues.
The Democratic and Republican platforms each devote several lines to restoring and sustaining the American Dream, which is smart. As we have noted, polling data show many Americans are still struggling to afford a home and think the government should be doing more to address the problem. Not surprisingly, the draft Democratic platform tilts more in favor of fortifying the government’s role in housing affordability.
Interestingly, however, a few months ago, veterans of Democratic Administrations, including Jim Parrott and Gene Sperling, co-authored a paper titled “A More Promising Road to GSE Reform.” The authors would replace Fannie and Freddie with a new entity, the National Mortgage Reinsurance Corporation (NMRC), and house regulatory functions at FHFA. They insist the NMRC would be required to meet the GSEs’ current duty-to-serve and affordability goals. However, they also call for policies that could make it harder for lower-income Americans to access affordable financing. For example, they proposed the NMRC purchase only those loans that a meet a Qualified Mortgage (QM), as defined by the Consumer Financial Protection Bureau. These are loans with a debt-to-income ratio (DTI) of 43% or less. However, 25% of GSE mortgages provided between 2009 and 2012 had DTIs above the QM standard. Therefore, it is easy to see how their proposal would lead to fewer opportunities to obtain financing for the very people Fannie and Freddie’s current rulemaking on the duty-to-serve requirements are supposed to assist. The fact that many of the authors of this proposal come from the Democratic establishment raises intriguing questions about the direction Hillary Clinton would take housing finance policy, if elected.
Whoever voters select in November will inherit a major piece of unresolved business from the 2008 financial crisis as well as a FHFA that has been quietly undertaking major policy changes by bureaucratic dictate for years. The next president should abide by all of HERA’s provisions, which include the duty to preserve and conserve the assets of Fannie and Freddie for shareholders along with the duty-to-serve requirements related to affordable housing.
