A Housing and Economic Recovery Act report card
September 06, 2024
Sixteen years ago today, Fannie Mae and Freddie Mac were taken into conservatorship. Since then, Fannie and Freddie have operated under rules, regulations, and oversight established by the Housing and Economic Recovery Act, a bi-partisan bill passed six weeks earlier by a Democratic Congress and signed into law by a Republican President.
We leave it to others to speculate how and when the GSEs should exit conservatorship.
But as Financial Services Committee staffers that worked on the HERA provisions for Fannie Mae and Freddie Mac, we wanted to reflect on how HERA has worked out in meeting the key objectives of housing affordability and GSE safety and soundness.
A strengthened regulator
Many housing experts concluded that the GSEs' regulator was asleep at the switch before 2008, allowing Fannie and Freddie to lower underwriting standards to compete in a frothy market, including purchasing no-doc, no-income loans.
HERA addressed that concern by creating the Federal Housing Finance Agency, with financial regulatory powers comparable to U.S. banking regulators. This was done just in time, since FHFA has acted not just as regulator, but also as conservator, for the last 16 years.
Safety and soundness
Since 2008, through various economic cycles and the COVID crisis, Fannie and Freddie have operated in a safe and sound manner and been consistently profitable. This is due to a combination of actions by FHFA, including: (1) significantly reducing interest rate risk by capping MBS portfolio holdings; (2) developing counterparty risk measures in areas like private mortgage insurance; and (3) setting GSE capital standards and building capital after ending the Treasury profit sweep.
The FHFA ,under both Republican and Democratic Directors, has done a commendable job of financial regulation, balancing housing mission and safety and soundness.
The conservatorship framework
HERA established a framework for capital regulation that, parallel to U.S. banking regulation, allowed the FHFA to take a GSE into conservatorship or receivership. This framework explicitly requires the FHFA to assess a GSE's capital in relation to its obligations, bringing increased financial rigor to the process.
Housing trust fund and capital magnet fund
HERA created the National Housing Trust Fund and Capital Magnet Fund, using an annual assessment against Fannie and Freddie. To date, the Housing Trust Fund has generated $3 billion in grants to the states to build and rehabilitate affordable rental housing for low income families and $1.9 billion for Capital Magnet grants to CDFIs and affordable housing organizations for affordable housing and community revitalization.
These assessments are in consideration for the significant financial benefits of the federal backstop that Fannie and Freddie enjoy and are comparable to the Federal Home Loan Bank Affordable Housing Program. These programs reflect the fact that our affordable housing challenges require not just loans but subsidies to reach lower income families.
Housing goals and loan limits
HERA strengthened the statutory housing mission of Fannie and Freddie. Housing goals were sharpened. The practice of buying low quality mortgage backed securities to meet goals – with an agreement to sell them right back – was ended. A generic low and moderate income goal was replaced with goal categories that included low-income homebuyers, very low income homebuyers, and a separate multi-family goal, with a focus on smaller loans
Housing goals, along with GSE loan limits, have played an important role in ensuring that Fannie and Freddie don't cherry pick just single family loans to higher income borrowers and high priced homes. If and when the GSEs exit conservatorship, creating more incentives to focus on profitability, they would play an even more important role.
Duty to serve
A recurring criticism of the pre-HERA GSE housing goals was that Fannie and Freddie could meet their housing goals while ignoring important affordable housing sectors. The GSEs had a tendency to ignore certain loan products, either because the loan volume was low or because these products involved more work than high volume cookie cutter single family loans.
Therefore, HERA created a statutory Duty to Serve for: manufactured housing, affordable housing preservation, and rural housing. Fannie and Freddie are now evaluated in each of these areas on loan volume, the extent to which they develop loan products, flexible underwriting guidelines, and their extent of outreach to qualified loan sellers. As a result, since HERA, GSE efforts in each of these areas has improved.
A path out of conservatorship
Finally, while there have been sporadic Congressional efforts to take Fannie and Freddie out of conservatorship, none advanced very far. We believe, however, that Congress is not needed for the GSEs to exit conservatorship, as Treasury and FHFA can use authority created under HERA to do this on their own.
That does not mean Congress does not have a role. Congress should conduct hearings and debate key issues to try to achieve a bi-partisan consensus on key issues, like whether a Utility Model is the best approach post conservatorship. And most experts agree it would be helpful for Congress to create an explicit federal guarantee of Fannie and Freddie MBS.
The ultimate irony is that the HERA conservatorship process has worked so well that neither FHFA nor Congress has apparently seen the need to end it. Only time will tell whether that ever changes.
Courtesy of Lawranne Stewart and Scott Olson, National Mortgage News
