Are Fannie and Freddie really affordable?
Are Fannie and Freddie really affordable?
J. Bradley Jansen
June 14, 2001
Congressional attempts to make housing more affordable may be misplaced. According to a recent GSE Report special supplement, “Fannie Mae’s and Freddie Mac’s UnAffordable Housing Goals,” the Congress may be squandering resources without really helping prospective homeowners.
Trying to help consumers, Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 which set “Affordable Housing Goals” for the government-sponsored enterprises Fannie Mae and Freddie Mac. These goals focused on low and moderate-income housing goals, special affordable housing goals, and geographically targeted goals: central cities, rural areas and other underserved areas.
These aims were a continuation of policies set for the private sector. Congress passed the Community Reinvestment Act of 1977 that puts regulatory restraints on depository institutions. These restraints aim to limit its lending policies in order to redirect credit allocation to what might have been “underserved” areas.
The CRA has gone through many variations as legislators attempt to ameliorate the severe regulatory burden that the Act imposes; Congress also tries to increase its effectiveness. However, the law intended to meet the same goals for the GSEs has not been reviewed sufficiently. Fannie Mae and Freddie Mac should be made to do more with their government favors.
Comprehensive reform of the regulations governing Fannie Mae and Freddie Mac has been neglected for too long. The GSE Report’s special supplement suggests a few minimum reforms. These recommendations include:
Adopting affordable housing goals modeled after the Community Reinvestment Act.
Hold the GSEs responsible for the decisions of their proprietary automatic underwriting systems, which effectively set the standard in the marketplace. This change should apply to all of the federal fair lending laws including the Fair Housing Act, the Equal Credit Opportunity Act, and the Home Mortgage Disclosure Act.
Adopt a system, similar to that of the Federal Housing Finance Board, which would channel annual profits into an affordable housing fund, which could be used to subsidize downpayments of those most in need.
Focus the GSEs’ business activities on the lower and moderate-income market rather than subsidizing loans to individuals that have above-average wealth.
Require the GSEs to act more fairly as an “essential facility” to serve the industry and consumers better. Charging all originators the same fee for the same service would be a good place to start. Replacing the current practice of playing favorites would reduce the corrupting influence the GSEs’ have on the market.
Reform the system of regulating the GSEs. One important change would be to consolidate the regulators into a single one. This new regulator should have the same funding practices as the other regulators and not have to plead with Congress each year for the necessary funds to make sure that taxpayers do not have to foot the bill for a Fannie or Freddie bailout.
These simple reforms are overdue and should be implemented as soon as possible. Failing to act on this report hurts both consumers and the industry.