Fannie Mae, Freddie Mac, and Federal Home Loan Bank Mission, Regulation, and GSE Status
Policy
Continued federal government support of America’s housing finance system through housing government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, is vital to our nation’s housing policy and must be maintained. The GSEs should foster increased direct and indirect support for housing finance and operate more competitively to lower mortgage costs in the marketplace. The regulatory structure for the housing-related GSEs must be strong, effective, and credible, allowing close scrutiny of their activities while supporting their ability and incentive to fulfill their housing mission.
Background
Fannie Mae and Freddie Mac, along with the Federal Home Loan Banks (FHLBanks), are government-sponsored enterprises (GSEs) that were created by Congress to reduce the cost of housing credit and improve affordable homeownership and rental housing opportunities. Through their Congressional charters, the GSEs receive federal privileges and legal exemptions that support the perception of an implicit federal guarantee of their obligations, which lowers GSE funding costs, allowing them to fulfill their charge by reducing the cost and increasing and ensuring the availability of financing for housing. Studies have shown that the GSEs lower mortgage rates by as much as 50 basis points, which NAHB estimates increases homeownership opportunities for approximately 2.2 million households.
Fannie Mae, Freddie Mac, and the FHLBanks play an integral role in federal housing policy and have evolved into extremely critical components of the nation’s housing delivery system. They sustain a well-established link to the international capital markets, eliminate regional disparities in mortgage interest rates/credit availability, and encourage a diverse array of mortgage lenders/originators. They also advance innovation in financing techniques and products to meet borrower, lender, and investor preferences and needs in both the single family and multifamily housing markets. With the help of Fannie Mae, Freddie Mac, and the FHLBanks, more than two-thirds of the nation’s households are home owners, but many sectors of the housing market remain underserved. Homeownership rates for minorities and certain other segments of the U.S. population remain unacceptably low. There continues to be a critical shortage of affordable rental housing and there are unmet needs in rural areas. The housing GSEs’ continuing role in providing capital for the secondary markets is critical to filling these gaps in the housing finance system.
Pursuant to the Federal Housing Enterprises Safety and Soundness Act of 1992 (the GSE Act), regulatory oversight for Fannie Mae and Freddie Mac is apportioned to the Secretary of the Department of Housing and Urban Development (HUD) for mission (new program approval and housing goals) and to the Office of Federal Housing Enterprise Oversight (OFHEO) for safety and soundness (capital regulations). Oversight for the FHLBanks (mission and safety and soundness) is the responsibility of the Federal Housing Finance Board (FHFB).
In recent years, several legislative proposals have been introduced that would restructure the present regulatory structure for Fannie Mae, Freddie Mac, and the FHLBanks. Congressional scrutiny of the GSEs was heightened following revelations in 2003 and 2004 of improper management decisions, accounting practices, and earnings smoothing at Freddie Mac and Fannie Mae.
NAHB supports congressional efforts to strengthen the financial safety and soundness and the housing mission regulation of the GSEs. The building industry believes oversight of these two areas must be balanced. Unfortunately, there are many who would like to take this opportunity to diminish or eliminate the advantages of the GSEs, treating them more as banking organizations. NAHB is concerned that changes to the GSE regulatory framework could harm these entities’ critical role in housing finance and, ultimately, raise mortgage borrowing costs.
Legislation reforming the regulatory oversight of the housing GSEs was considered by the 109th Congress, but ultimately died due to policy differences between the House and Senate reform packages, in many key areas, most notably: affordable housing requirements, portfolio limits, and program/product approval. NAHB supported the House-passed bill H.R. 1461, which was a balanced bill that included many of NAHB’s priorities in key areas and did not include several adverse provisions sought by those seeking to restrict GSE activities. In contrast, the Senate bill, S. 190, contained many restrictive provisions that could harm the nation’s housing finance system, including: restrictions on asset holdings, discretion to raise minimum capital, burdensome program approval process, and a regulatory structure tilted away from housing. In addition, S. 190 did not require Fannie Mae and Freddie Mac to set aside monies to fund affordable housing initiatives, as provided in the House-passed bill.
Debate on GSE reform has resumed in the 110th Congress. However, with a change in party control in both the House and Senate, the dynamic for consensus has changed significantly. Indeed, the House Financial Services Committee considered and passed a bipartisan GSE reform bill in early 2007 based on the House-passed bill from the 109th Congress and negotiations with the Department of the Treasury during year-end negotiations in 2006. The bill, the Federal Housing Finance Reform Act of 2007 (H.R. 1427), creates a strong independent regulator with oversight for the three housing GSEs – Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. It also establishes an Affordable Housing Fund (AHF) that will, in its first year, disburse grants for the construction of affordable housing in areas affected by Hurricane Katrina. In the second through fifth years (after which the fund terminates), the fund will be used for affordable housing projects nationwide. Significantly, the bill ensures a level playing field for both for-profit and not-for-profit entities in the allocation of AHF funds. The bill also does not contain restrictive portfolio and capital provisions, such as those in the 109th Congress’ Senate bill.
Companion legislation has not been introduced in the Senate, but the Democrat-led Senate Banking Committee is expected to consider GSE reform legislation, similar to that moving in the House. Thus, any GSE legislation passed in the 110th Congress is more likely to be similar to the House bills and would not include strict portfolio caps, but would include an affordable housing fund component – a significant departure from previous Senate versions.
Solutions
Support restructuring of the mission and safety and soundness regulation of the housing-related GSEs based on the following principles:
Financial Safety and Soundness Regulation
Efforts to improve financial safety and soundness regulation should be employed to enhance the capacity of the GSEs to fulfill their mission. Efforts to privatize, withdraw any of the federal privileges and legal exemptions, or otherwise diminish the ability of the GSEs to provide housing financing at the lowest possible cost should be opposed.
The regulator should be granted full authority to establish risk-based capital standards and to impose temporary increases in the minimum capital requirement for a GSE in response to an extraordinary adverse change in the GSE’s financial condition.
Mission
The GSEs should fulfill their public mission by conducting activities authorized by their charters in a safe and sound manner and by promoting access to mortgage credit to address housing needs, including financing for housing production, homeownership, and multifamily housing throughout the nation.
The program approval process should be constructed to foster innovation and prompt responses to market needs.
The GSEs should be required to meet challenging affordable housing requirements designed to facilitate and ensure the efficient conveyance of GSE advantages to homeownership and multifamily housing production and preservation, while supporting the effective operation of the housing finance markets.
All housing GSEs should be required to meet affordable housing goals, which are appropriate to their unique structures, on their mortgage purchase programs as well as set aside a reasonable percentage of their profits to support affordable housing efforts, with a level playing field for for-profit housing sponsors in the criteria for awarding such funds.
Affordable housing goals should provide incentives for the GSEs to increase their activities in rural areas particularly for small multifamily projects.
Structure of a GSE Regulator
The regulator should be an independent agency and possess adequate authority and resources to conduct oversight over all housing-related GSEs.
Mission oversight of Fannie Mae, Freddie Mac, and the FHLBanks (including approval of new programs and enforcement of affordable housing requirements) should be conducted by an entity with a thorough understanding of, and an extensive involvement in, housing-related issues.
GSE Governance
The boards of directors of Fannie Mae, Freddie Mac, and the FHLBanks should have appointed members with expertise important to the direction of GSE mission activities.
