The Fannie And Freddie Reform Logjam
The prospect for reform of the government-sponsored housing finance enterprises Fannie Mae and Freddie Mac has taken a giant step backward, despite the fact that the bipartisan bill proposed by Senators Tim Johnson (D-SD) and Mike Crapo (R-Idaho) and designed to shift their role to new private entities, managed to clear the Senate Banking Committee last week. The limited support among committee Democrats means the bill is unlikely to come to a full Senate vote and has, in effect, suffered death by a thousand cuts. Non-profit home-ownership advocacy groups on the Left feared that incentives for private versions of the two government-sponsored enterprises to extend credit to so-called “underserved” groups would not be as effective as the affordable housing mandates which force Fannie and Freddie to purchase mortgages made to low-income and minority buyers. Their view likely influenced recalcitrant committee Democrats. Even had it had such support, the bill faced looming House opposition from those who argued (as have I) that affordable mandates would lead to easy credit—and a repeat of the 2008 housing foreclosure and delinquency crisis, with the poor themselves most at risk. Just to make things even more complicated, the bill also suffered because of a split on the Left, as a range of other housing non-profits, including the National Low-Income Housing Coalition, supported the bill because of its encouragement of more low-income rental housing.
These developments remind us that, as in some many parts of American life, the non-profit sector has come both to depend financially on government for revenue (affordable housing rely on affordable housing mandates, as well as tax credit financing) and to see policy advocacy as much of its raison d’tre. But they also mean, as regards housing policy, that the course of least resistance is now an unhappy one: the status quo ante. Fannie and Freddie would continue, with some level of affordable housing mandates—perhaps higher rather than lower given the recently-expressed preference of Federal Housing Finance Director Mel Watt, who oversees the mortgage giants, for less-strict mortgage underwriting guidelines.
Finding a way out of this impasse will not be easy—and may, indeed, be impossible, given the fact that the status quo serves so many interests well. But it is well worth continuing the effort to privatize Fannie and Freddie—in light of the cautionary tale which their $150 billion post-crisis bailout offers (even if they’ve since used their near-monopoly to right themselves financially). There may, however, be a way to resolve the affordable housing mandate impasse, in a manner which offers something for both Left and Right: continue the mandates (albeit in new form, as goals for private mortgage insurance entities) but require something else that’s new: a level of reporting and accountability.
Here’s why. To the extent that government-mandated low-income housing goals distorted markets and contributed to the housing crisis, that problem was exacerbated by the fact that those goals are satisfied by the mere origination of mortgages to select groups. There has been neither an accounting, nor a goal, related to the actual performance of such mortgages. The same is true of mortgages originated by banks to fulfill their obligations under the Community Reinvestment Act, the 1977 law which is the philosophical forerunner of the Fannie and Freddie mandates.
One way a revised GSE reform bill could break the current legislative Gordian knot could be to provide a reporting-based incentive for banks—and non-profit groups doing their own mortgage origination or counseling—to make loans that perform successfully. Advocacy groups have long argued that banks are not well-suited to judge the likelihood that low-income borrowers will make good on their mortgage payments—implying that there should be underwriting approaches in addition to credit scores on which to base lending. If this is true—let’s find out. Let’s mandate not only that the private versions of Fannie and Freddie serve the “underserved”—but that we develop report cards about such loans. Banks should develop performance scorecards for their CRA-eligible lending and non-profit groups who receive grants to counsel low-income buyers should be required to report, as well —both about whether those that they counsel actually purchase homes and whether they lapse into delinquency or foreclosure. All this would increase the likelihood that well-qualified low-income homebuyers would not see the value of their asset undermined by a delinquency or foreclosure next door. Easy credit, indeed, is the enemy of asset accumulation for those of modest means.
It’s my own hypothesis that credit scores—which barely existed when the Community Reinvestment Act was enacted—are pretty reliable indicators of how loans will perform (and, indeed, banks have developed more and more subtle versions of such scores to aid them in underwriting). But if affordable housing mandates are the key barrier to GSE reform, it’s worth seeking a middle way based on a simple approach that works pretty well in corporate America: reporting results
This piece originally appeared in Forbes
This piece originally appeared in Forbes