Paving the Path to a More Responsible System of Housing Finance
The Federal Housing Finance Agency, the federal regulator that oversees the government-controlled mortgage financiers Fannie Mae and Freddie Mac, on May 14 released its draft strategic plan outlining its performance goals and policy agenda for the next five years. In response, the Mortgage Finance Working Group—a collection of housing finance experts, affordable housing advocates, and leading academics sponsored by the Center for American Progress—last week submitted comments for the public record. Below is a summary of those comments. The official comment letter can be downloaded here.
The Mortgage Finance Working Group, with the generous support of the Ford Foundation and the Open Society Institute, began gathering in 2008 in an effort to better understand the causes of the mortgage crisis and create a framework for the future of the U.S. mortgage system. In January 2011 we released our proposal for reform, “A Responsible Market for Housing Finance,” which builds off five guiding principles for any effort to responsibly wind down Fannie Mae and Freddie Mac and bring private capital back to the mortgage market:
- Liquidity. Provide participants in the capital markets with the confidence to deliver a reliable supply of capital to ensure access to mortgage credit, every day and in every community, through large and small lenders alike.
- Stability. Rein in excessive risk taking and promote reasonable products backed by sufficient capital to protect our economy from destructive boom-bust cycles, such as the one we are now struggling to overcome.
- Transparency and standardization. Require underwriting, documentation, and analytical standards that are clear and consistent across the board so consumers, investors, and regulators can accurately assess and price risk, and regulators can hold institutions accountable for maintaining an appropriate level of capital.
- Affordability and access. Ensure access to reasonably priced financing for both homeownership and rental housing.
- Consumer protection. Ensure that the system supports the long-term best interest of all borrowers and consumers and protects against predatory practices.
These principles represent the essential functions of the two mortgage finance giants Fannie Mae and Freddie Mac—functions that must be maintained and preserved throughout the transition to any new system of mortgage finance. As conservator of Fannie and Freddie, the Federal Housing Finance Agency, or FHFA, will play a critical role in that effort. FHFA’s draft strategic plan lays out the agency’s current policy priorities, and here’s how those priorities align with our guiding principles. (Issues regarding “consumer protection” often overlap with the other four principals, so we will not discuss them separately.)
Broad and constant liquidity
In the aftermath of the housing crisis, investors have lost confidence in the credit quality of mortgages that are not guaranteed by the federal government. As a result, the government has backed roughly 90 percent of residential mortgage originations since the fall of 2008. A central goal for any reform effort is to restore investor confidence to transfer a meaningful portion of the credit risk from taxpayers to private investors, and FHFA’s draft strategic plan suggests some early steps toward that effort.
But we urge FHFA to roll out these initiatives carefully, striking the appropriate balance between controlling taxpayer risk exposure, enforcing sound underwriting, and promoting reasonable access to mortgage credit for American families. This means accurately pricing fees to reflect the riskiness of the mortgage product offered and the government’s cost of issuing the guarantee, not the private sector’s. And at a time of growing need for affordable rental housing, we urge FHFA to lay out a balanced housing policy that includes goals and benchmarks for both single- and multifamily finance.
Housing market stability
FHFA’s draft strategic plan underscores the ongoing importance of government support to promote a stable U.S. residential mortgage market, as well as the perils of a quick and drastic transition to a purely-private market. Fannie and Freddie are playing a critical role in the market today, and steps must be taken to ensure that we do not jeopardize the ability of these entities to continue to perform that role. This includes finding ways to retain top talent and limit future losses from reductions in staff and other resources, as well as minimizing near-term losses by ramping up proven foreclosure prevention efforts, including mortgage principal reduction.
Transparency and standardization
The recent crisis has taught us that unregulated private capital poses a tremendous risk to the broader financial market. Without clear rules of the road, private investors are not likely to have the confidence to fund the needs of the U.S. residential mortgage market without a government guarantee. To help solve this problem in the future, FHFA proposes to create a single platform through which all mortgage-backed securities are issued, consisting of uniform underwriting requirements, servicing standards, and pooling and servicing contracts. In concept this can be an important step forward, but we would like to see more details on FHFA’s proposal.
In addition, FHFA must work with other financial regulators to set clear rules for the entire secondary mortgage market—such as adequate capital standards and risk retention requirements—that ensure every market player is held accountable for their actions and maintains some skin in the game.
Access and affordability
A critical goal for FHFA should be for borrowers to access the same terms and conditions from all lenders at all times. Without a serious commitment from the federal government, lenders and other mortgage investors will naturally serve only high-profit, low-cost borrowers, leaving many creditworthy borrowers without access to affordable homeownership. While we applaud FHFA for setting a goal to “expand access to housing finance for diverse financial institutions and qualified borrowers,” including the inclusion of minority- and woman-owned financial institutions in the activities of Fannie Mae and Freddie Mac, we’d like to see the agency go one step further.
Therefore, we urge FHFA to carefully examine the mortgage market’s current credit profile and assess whether borrowers that were successfully served by the GSEs in the past are now being forced into alternative credit enhancements, such as insurance programs offered by the Federal Housing Administration, or out of the market entirely.
Before we can move toward a more responsible and sustainable system of U.S. housing finance, Congress and the Obama administration must answer several key public policy questions. In the meantime, FHFA must focus on mitigating losses at the assets held by Fannie and Freddie, overseeing the strategy and business activities at Fannie and Freddie, promoting a stable and accessible national housing market, and laying the foundation for a smooth transition toward any new system.
Nearly four years into the conservatorship of Fannie and Freddie, with no clear path forward for winding down the companies, FHFA is right to be thinking long-term. We commend FHFA for the work it has done so far to protect taxpayer investments in the two mortgage finance giants, and look forward to working with the agency to help mend a housing market that remains one of the biggest drags on our economic recovery.
The Mortgage Finance Working Group is a collection of housing finance experts, affordable housing advocates, and leading academics sponsored by the Center for American Progress, with the generous support of the Ford Foundation and the Open Society Institute.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.