After numerous academic and other studies showed that Fannie Mae and Freddie Mac were not doing as much as banks to provide affordable and low income housing--a function that the GSEs describe as part of their "mission"--in April the Department of Housing and Urban Development proposed draft regulations that would increase the GSEs' obligations in this area. Fannie and Freddie and some of their allies in Congress immediately complained that HUD had gone too far and that the revised standards might increase their risks and reduce their earnings. This response raises once again the question of whether a government "mission" can be performed by a shareholder-owned company.
In a June 2004 letter to the Office of Federal Housing Enterprise Oversight, commenting on OFHEO’s proposed corporate governance regulations, Ann M. Korologos, the chair of Fannie’s corporate governance committee, neatly outlined the essence of this conflict of interest. Fannie's directors, wrote Korologos,"are concerned that the [OFHEO] proposal’s focus on the federal charters and 'public mission' of the Enterprises may detract from our role as representatives of Fannie Mae's shareholders. As directors, our duty is to act in the best interest of the shareholders." At this conference, experts will review the HUD regulations and consider whether Fannie and Freddie are suitable vehicles for performing a government mission. Representatives of Fannie and Freddie were invited, but declined to participate.
|1:45 p.m.|| |
|2:00||Introduction:||Peter J. Wallison, AEI|
|2:15||HUD's Affordable Housing Regulations|
|Presenter:||John C. Weicher, Department of Housing and Urban Development|
|Discussants:||Jay Brinkmann, Mortgage Bankers Association|
|Jonathan Brown, Essential Information|
|Anne Canfield, Consumer Mortgage Coalition|
|Moderator:||Peter J. Wallison, AEI|
HUD's Affordable Housing Regulations: Serving Two Masters ReduxOn September 13, 2004, AEI held a conference evaluating HUD's affordable housing regulations. After many academic and other studies showed that Fannie Mae and Freddie Mac were not doing as much as banks to provide affordable and low income housing-a function that the GSEs describe as part of their "mission"-in April, the Department of Housing and Urban Development proposed draft regulations that would increase the GSEs' obligations in this area. Fannie and Freddie and some of their allies in Congress immediately complained that HUD had gone too far, that the revised standards might increase their risks, reduce their earnings, and require them to slight the needs of the middle class. This response raises once again the question of whether a government "mission" can be performed by a shareholder-owned company. At this conference, experts reviewed the HUD regulations and consider whether Fannie and Freddie are suitable vehicles for performing a government mission, and the panel included a presentation by Assistant Secretary of HUD John C. Weicher.
John C. Weicher
U.S. Department of Housing and Urban Development
HUD has three main housing goals it must consider: serve the low- and moderate-income family; meet the needs of the special affordable housing goal for those families with very low incomes; and support the underserved areas goal for families living in low-income census tracts or low- or middle-income census tracts with high minority populations. The GSE Act of 1992 requires HUD to consider certain factors in setting goal levels, including the GSEs' past performance on the goals; the ability of the GSEs to lead the industry in making mortgage credit available for targeted borrowers and locations; national housing needs; and the need to maintain the sound financial condition of the GSEs. Both Fannie Mae and Freddie Mac have met all the goals each year since 1995. However, for 2001-2003, HUD awarded both GSEs bonus points, and without them, the GSEs would have failed to meet all the goals in 2001 and 2002. In 2004, HUD decided not to renew the bonus points.
HUD is currently considering a new proposed GSE rule. For 2005, there are three main changes relative to the current rule: First, goal levels are significantly higher than HUD's goals for 2001-2004. Secondly, the proposed goal levels rise in nearly equal steps from year to year. This staging will allow the GSEs time to adjust their business models to meet the required levels. Lastly, HUD is proposing to establish Home Purchase Sub-goals under each housing goal. In summary, HUD's proposed increase from 31 percent to 38 percent for the Underserved Area Goal incorporates 2000 census data, which includes more underserved tracts than the 1990 census data. The proposed rule also pays close attention to first-time homebuyers, an area where the GSEs are weak, specifically regarding Hispanic and African-American homebuyers.
HUD believes that the GSEs should--but currently do not--lead the market in home purchase loans. Numerous studies by HUD and other researchers have shown that the GSEs have lagged behind the private home purchase mortgage market in funding affordable loans in recent years. However, they should be able to play a true leadership role in the market under the new proposed rule. The GSEs have been increasing their purchases of loans for low-income families and in underserved areas. Under the new goals and sub-goals, GSE performance will continue to improve. In addition, the new goals will fund more loans for borrowers on the margin of homeownership. In turn, many low-income and minority first-time homebuyers will benefit from low, prime market interest rates. This will require the GSEs to make prudent adjustments in their underwriting standards. In general, loans that qualify for the new housing goals are more likely to be for first-time homebuyers, minorities, and borrowers requiring low down payments. HUD's home purchase sub-goal will also support President George W. Bush's initiative to create 5.5 million new minority homeowners by the year 2010.
It must be stressed that the proposed goals discussed today, are just that--proposed. Initially published on May 3, HUD extended the sixty-day comment period, scheduled to end on July 2, to July 16. The final rule will be published in the Federal Register by November and will become effective on January 1, 2005.
Mortgage Bankers Association
The most significant problems we see in HUD's new proposed rule relate to structural problems--trying to meet multiple objectives with a single tool--and market estimation difficulties that occur when goals set too high exacerbate existing market distortions and create operational problems. The GSEs continue to meet HUD's goals through the least-cost solutions, which are not necessarily what Congress had in mind when it granted them authority. A problem with HUD's market measurement rests on its estimation of the size of the low-moderate income market. The impact a miscalculation could have would ration credit without a plan for how that credit should be rationed. The impact of this rule can also be seen on the multi-family market. The GSEs' share of multi-family loan originations already exceeds their share of single-family originations--did Congress intend for HUD to encourage the GSEs to capture 90 percent of the multi-family market? We suggest looking at the potential benefits for affordable lending if HUD's calculations are correct versus the costs to the market if HUD is wrong, and weighing those outcomes by the profitability that HUD's calculations are correct. If it is HUD's goal that GSE participation in the higher income markets should be reduced or rationed, HUD should be explicit in saying what the mechanism should be for imposing that rationing so that the industry can comment or plan accordingly.
Consumer Mortgage Coalition
Under the GSEs' affordable housing regulation, Fannie Mae and Freddie Mac have two main functions: provide liquidity to the mortgage market and provide assistance to low-and moderate-income housing. That being said, HUD was guided by four main principles in this rule-making: make the GSEs the leaders in the market, eliminate discrimination in lending, set parameters without dictating special loan products or delivery mechanisms, and support an active secondary mortgage market in multi-family lending. The Consumer Mortgage Coalition largely supports HUD's broader policy goal to improve GSEs' affordable housing performance, but the proposed rule will still place the GSEs behind the market in key areas and is likely to cause distortions in the existing housing market. This is largely due to housing goals that do not match up and too much focus on a market segment that does not need help. Our recommendation is that HUD should use its general regulatory authority to require the GSEs to develop appropriate standards to ensure that the benefits of GSE status flow through to lower middle-income borrowers. HUD should also use its general regulatory authority to prevent onerous business practices. Instituting a series of additional reforms and reporting requirements that would assist affordable housing goals would also be a worthwhile measure. This is HUD's fourth attempt to impose meaningful affordable housing requirements on the GSEs; they should get it right this time around.
The central issue is that housing regulations are not properly targeted. They are too broad and have many unintended consequences. Under the current system, it is inevitable that the GSEs will under-serve the low-median-income borrower and fulfill only the needs of the higher income borrower. This is proven in market share data and supports the notion that GSEs are "trading off" one market for another. There are some cases where broad goals make sense, but discrimination occurs in this case. A partial solution is to institute sub-goals for different borrowers at various levels to ensure that each segment receives equal treatment. This would be particularly beneficial for minority borrowers, who often rely on a "trickle down" effect in homeownership benefits.
AEI research assistant Jessica Browning prepared this summary.