Last week, Senate Republicans blocked a vote to confirm Rep. Mel Watt (D-NC), President Barack Obama’s nominee to lead the Federal Housing Finance Agency, or FHFA. This latest political obstructionism comes at a time when millions of families are finding it harder to buy a home, rent an affordable apartment, or are still at risk of losing their home to foreclosure.
In recent years, the agency’s myopic focus on restoring the short-term health of Fannie Mae and Freddie Mac—the nation’s housing-finance engines—has harmed not only individual families but also the housing market as a whole and is stifling a robust housing recovery. FHFA urgently needs new leadership to address the housing challenges facing working and middle-income families and to foster a healthy housing market now and for coming generations.
As the regulator and conservator of Fannie Mae and Freddie Mac, FHFA has the authority and opportunity to strengthen the foundation of the housing market by making credit more accessible and affordable to qualified borrowers, ensuring an adequate supply of affordable rental housing, and helping struggling homeowners keep their homes. In this column, we will explore steps FHFA can take in the near term to help the nation move fully past the housing crisis, as well as what’s at stake if the Senate continues to stall and FHFA continues to ignore the nation’s greatest housing challenges.
Help families and neighborhoods recover from the foreclosure crisis
Despite the uptick in home prices, millions of borrowers continue to struggle, including many who are still in the foreclosure pipeline or at risk of foreclosure. This ongoing crisis hurts these families, their surrounding communities, and the broader economy. The foreclosure crisis has devastated the financial security of millions of families, with more than 4 million foreclosures completed and the loss of $7 trillion in housing equity.
Families of color have been hit especially hard. According to the Pew Research Center, African American and Hispanic families lost 53 percent and 66 percent of their wealth, respectively, as a result of the foreclosure crisis. The typical foreclosure also reduces the value of neighboring homes, costs local governments critical tax revenue and maintenance expenses, and even results in lenders and investors losing tens of thousands of dollars per foreclosure.
Many of these at-risk borrowers owe far more than their home is worth and are therefore unable to bring costs down by refinancing into a lower interest rate. Moreover, these borrowers often find themselves vulnerable to mortgage-servicing errors or high-cost homeowner’s insurance products that make it far more difficult to hold onto their homes.
The nation cannot afford 2.1 million more foreclosures—the estimated number of homes in the foreclosure pipeline. Yet to date, beyond their Servicing Alignment Initiative—which created a set of uniform requirements with which companies servicing a Fannie Mae or Freddie Mac-backed loan must comply—FHFA has resisted additional meaningful steps to help homeowners reduce costs and to support strong consumer standards that protect homeowners from costly abusive practices.
There are several additional actions a new director could take to help keep families in their homes and repair the damage done to neighborhoods. First, FHFA should adopt a well-designed principal-reduction program to prevent foreclosures. Both the agency’s internal studies and the Congressional Budget Office have concluded that principal reduction in the form of forgiveness rather than forbearance can save homes and save money for Fannie and Freddie. By allowing servicers of loans backed by government-sponsored enterprises, or GSEs, to lower a borrower’s loan amount, FHFA could help underwater homeowners boost equity in their home and lower their monthly payments—making it more likely that they will stay in their homes and meet their mortgage obligations. While principal reduction is no silver bullet for the health of the housing market as a whole, it could save the homes of hundreds of thousands of additional borrowers, making a huge difference for those borrowers, their families, and their communities.
Second, a new director could ensure that Fannie and Freddie do something about the extremely high cost of lender-placed insurance. Lenders must obtain this insurance on behalf of a homeowner if a homeowner’s property insurance lapses, but the costs of lender-placed insurance are exorbitant because mortgage servicers often receive kickbacks—in the form of free or below-cost services, commissions, or bonuses—from the insurance companies. Meanwhile, the borrower is saddled with the extra cost. In many cases, incorrectly placed or excessively pricey insurance has caused defaults by borrowers who otherwise were well able to pay their mortgages. When a borrower defaults, Fannie Mae and Freddie Mac have to absorb the cost.
This week, the agency announced that it will prohibit kickbacks between insurance companies and mortgage servicers. While such a prohibition is necessary, the rule alone will not bring costs down for consumers. Insurers are likely to find loopholes in the rule and to compensate servicers in ways that are not explicitly banned. In order to change the marketplace, FHFA should allow Fannie Mae and Freddie Mac to purchase the force-placed insurance directly from insurance companies, instead of making them rely on mortgage servicers to make the purchasing decisions. A new director can make sure that FHFA takes these steps to protect homeowners, Fannie Mae and Freddie Mac, and therefore taxpayers, from these unfair costs.
Third, a new director could immediately end plans to punish states for protecting homeowners during the foreclosure process. In 2012, FHFA issued a proposal to increase the guarantee fees it charges on GSE-backed loans in states where foreclosures take a long time. Yet as dozens of settlements and court cases show, consumer protections often do not explicitly extend foreclosure timelines; rather, these timelines stretch out because servicers simply refuse to comply with the protections. Indeed, consumer-protection laws that ensure that foreclosures are carried out in a fair and responsible way can prevent unnecessary foreclosures, thereby helping neighborhoods avoid the devastation and costs associated with foreclosure, including declining property values and increased crime.
Get the mortgage market working again for qualified borrowers
A long-term recovery cannot rest solely on refinancing and cash investors—currently the foundation of our nascent housing recovery. Ultimately, a robust and lasting housing-market recovery will require a resurgence of owner-occupant homebuyers, yet many creditworthy Americans are unable to secure a mortgage for a home. Today’s typical borrower approved for a Fannie or Freddie mortgage has a FICO score of 755 and makes a 20 percent down payment. Given that nearly two-thirds of Americans have credit scores below 750 and that it takes a median-income family more than 25 years, and even up to 38 years, to save for a 20 percent down payment,* it’s no surprise that fewer families are buying their first home.
If FHFA does not take proactive steps to make sure lenders are serving qualified borrowers in all markets, the housing market could continue to suffer for years to come. Three critical segments of the future housing market—Millennials, borrowers of color, and rural borrowers—are all disproportionately impacted by today’s hobbled mortgage market. Families of color, expected to represent 7 out of every 10 families formed in the next decade, have homeownership rates that are far below the national average; the homeownership rates among people in their 30s are at their lowest in a generation, and loans are often more expensive in rural areas.
A new director could take a few concrete actions in the near term to help revive the mortgage market and support a thriving housing market for future generations. First, FHFA can commit to keeping the guarantee fee at its current level until there is reliable evidence to suggest that the government needs more revenue to cover the cost of the guarantee. FHFA has raised the guarantee fee from 21 basis points in 2007 to more than 50 basis points today in an explicit effort to “crowd in” private investors and reduce GSEs’ presence in the marketplace. Analysts have cautioned that the current fee is far higher than necessary to cover the cost of credit risk. The dramatic increase in the guarantee fee has not moved private capital into the single-family market, though it has accelerated the GSEs’ return to record profits, which go to the U.S. Treasury. Freddie Mac’s recent risk-transfer transaction underscored that the pricing of the guarantee fee far exceeds the actual costs to the system.
Second, the Federal Housing Administration, or FHA, should use a powerful tool that FHFA received at its creation in the Housing and Economic Recovery Act of 2008, or HERA: the so-called duty to serve rule. This rule requires the GSEs to step up their efforts to serve three specific goals: increasing availability of credit for manufactured housing, preserving existing affordable rental units, and serving rural markets. But FHFA has yet to implement this rule.
Since 2010, the broader economy and financial system have stabilized, and the GSEs are again earning significant proceeds. Now is the time to revisit the “duty to serve” rule and establish meaningful criteria to measure whether or not Fannie Mae and Freddie Mac are fulfilling their statutory responsibility to serve all creditworthy borrowers. Without this layer of accountability, even as general credit availability eases, the conventional mortgage market may continue to ignore working and rural households.
Third, banks frequently complain about unclear contract terms that make it difficult to anticipate when they will be forced to buy back a loan they have sold to Fannie Mae or Freddie Mac. These lenders say they are unilaterally excluding certain borrowers who are not at the very highest credit-score or down-payment levels because they fear they will have to buy some of them back. FHFA should do more to clarify the contracts and should take steps to penalize banks that are excluding broad swaths of qualified borrowers from their mortgage lending.
Finance affordable rental housing for working and middle-income families
As a result of the foreclosure crisis, a tight mortgage market, and demographic shifts, far more households in the United States are renting than five years ago. However, the production of rental housing has not kept pace with this increase, and renters are facing serious housing-affordability challenges as a result. One in four renters spends more than half of his or her monthly income on housing—a sharp increase from a decade ago. Higher rents make it more difficult for families to meet their housing needs and could even make renters harder pressed to pursue higher education, homeownership, or retirement savings—investments that benefit individual families and the broader economy.
Despite these challenges, FHFA announced in its stated goals for the year that it will require Fannie Mae and Freddie Mac to reduce their multifamily businesses—their financing for rental-apartment housing—by 10 percent this year. Fannie Mae and Freddie Mac generated nearly 60 percent of multifamily debt last year in the United States, and the vast majority of these loans serve households who earn less than the median income. Low- and middle-income families could experience further rent increases or housing shortages if Fannie Mae and Freddie Mac roll back their presence in the marketplace.
A new director should immediately rescind this arbitrary 10 percent goal and maintain the multifamily businesses in their current form to avoid contributing to the shortage of affordable rental housing. This view is widely shared: In response to a recent request for public comment on this plan, 40 out of the 42 diverse industry, community, governmental, and consumer organizations that weighed in strongly opposed the proposed reduction in these lines of business, according to analysts at FBR Capital Markets & Co.
Equally important, FHFA should begin to capitalize the National Housing Trust Fund and the Capital Magnet Fund, which support the development of rental units that are affordable to very low-income families. Under HERA, FHFA is required to capitalize these funds with proceeds from Fannie and Freddie, but no funds were ever collected. Now that the GSEs are generating significant proceeds, it is time to share them with the nation’s neediest families.
Conclusion
The Federal Housing Finance Agency has broad power to dramatically improve access to affordable home lending, prevent unnecessary foreclosures, and ensure a healthy credit market for affordable rental housing. A new director can ensure that the nation’s housing market achieves a healthy and sustainable recovery and that it serves all creditworthy households that desire and are prepared to accept the responsibility of owning a home. The Senate should immediately confirm Rep. Watt to lead FHFA so he can take the steps necessary to repair the housing market and work together with lawmakers as they craft legislation regarding the future of the nation’s housing finance system.
Sarah Edelman is a Policy Analyst in the Economic Policy division at the Center for American Progress. Julia Gordon is the Director of Housing Finance and Policy at the Center.
* Estimate is based on the U.S. Census Bureau’s 2012 median income of $51,017 and the National Association of Realtors’s 2012 median home-sale price of $177,200. Estimate assumes closing costs of 5 percent, an annual pre-tax savings rate of 4.54 percent—based on the U.S. Bureau of Economic Analysis’s most recent national income and product accounts—and that either half or two-thirds of savings goes toward down-payment and closing costs.