Understanding the Latest Housing Finance Reform Outline
Last Friday, Senator Mike Crapo (R-ID) released an outline for reform of the housing finance system that would convert Fannie Mae and Freddie Mac (collectively, the government sponsored enterprises, or GSEs) into private guarantors of mortgage-backed securities (MBS) that would then be sold through a platform operated by Ginnie Mae. The new Ginnie Mae–backed securities would carry an explicit full-faith and credit guarantee from the federal government that would be paid for by the GSEs, and by any other guarantors who enter the market later. Guarantors would be allowed to fail and would be resolved in a manner similar to insolvent banks. The price of the guarantee would change over time, and like FDIC insurance, would allow taxpayers to be made whole in the event of catastrophic losses to the insurance fund that required Treasury funds to uphold the guarantee and also make investors whole.
The outline explicitly addresses the future of the GSEs’ multifamily businesses, stipulating they would be sold off from their parent corporations and operated as independent guarantors. The outline offers no indication of whether the risk-sharing structures currently found in GSE multifamily securities would change (currently, Fannie Mae splits losses equally with the lender, while Freddie Mac sells off the top 15 percent of losses to investors before guaranteeing the rest) or whether access to the Ginnie Mae backstop for multifamily would be priced differently from single-family MBS, given the very different risk profile of the two.
Critically, Sen. Crapo’s housing reform outline would eliminate any affordable housing goals or duty to serve obligations, replacing them with “a new Market Access Fund, which will provide grants, loans, and credit enhancement to address the homeownership and rental housing needs in underserved and low-income communities.” This new Market Access Fund (MAF), in addition to the existing National Housing Trust Fund and Capital Magnet Fund, would collectively be funded through a 10–basis point (one-tenth of 1 percent) fee to be assessed on the annual volume of loans guaranteed by each guarantor. The brief proposal is ambiguous as to whether the assessment would be levied on new originations or all outstanding guarantees, but if it is designed to mirror a discussion draft circulated early in 2018, the majority of the funds would be used for downpayment assistance and interest rate buydowns for homeowners.
Replacing guarantors’ specific commitments to support affordable housing and underserved markets with the MAF is misguided and represents a substantive departure from Sen. Crapo’s bipartisan approach in the 113th Congress’s Housing Finance Reform and Taxpayer Protection Act of 2014 (S. 1217), which passed out of the banking committee before stalling in the full Senate. We believe a publicly backed housing finance system should serve the vast majority of the would-be MAF beneficiaries through the normal course of business and without special assistance as part of an obligation to provide public benefit in exchange for access to the government guarantee. It is a mistake to conflate the public purposes envisioned in the targeted focus of affordable housing goals and duty-to-serve regimes with a fundamental need for the system to incorporate broad access to mortgages and greater affordability as core functions and standard business practices. We believe the housing finance system should be designed from the start to serve eligible borrowers of modest and mid-priced homes in the normal course of business and without special programs, while any affordability fees should be used to support the specific housing needs of the lowest-income families and underserved markets first.
Moreover, eliminating any obligations for guarantors to serve lower-income borrowers and underserved communities would establish a two-tiered market and, given the known disparities in income and wealth between white and minority borrowers, raise questions of fair lending and disparate impact. Without a mandate that requires guarantors to serve the market broadly, the system envisioned in Sen. Crapo’s outline may simply subsidize home purchases (and refinancing) by the wealthiest households.
We have previously written about the need for housing finance reform and have offered policy recommendations for creating a more stable, accessible, and affordable system of mortgage finance in the United States. We are hopeful that as Congress renews discussion of housing finance reform, the resulting system will be designed to focus on the needs of owners and renters. The explicit, paid-for guarantee proposed appears to be a workable structure for the single-family mortgage market. There are, understandably at this stage, open questions on how multifamily finance might be impacted that would need to be resolved before the proposal could be considered complete. However, replacing any affirmative obligations to affordable housing and underserved markets with a simple fee is a step in the wrong direction. The access and affordability provisions in committee-passed S. 1217, while imperfect, would serve as a much better starting point for improving the housing finance system.