Fannie Mae and Freddie Mac are set to grow, and that has conservative economists worried.
Both parties and both chambers of Congress agree in principle that the bailed-out government-sponsored mortgage enterprises need to be shut down and replaced with a new system of housing finance, to prevent the model of private profit at public expense that many blame for the companies' failure and bailout from taking hold again.
But the companies’ government overseer announced Friday that it was setting new, more expansive affordable housing goals for Fannie and Freddie, the latest in what right-of-center analysts see as in a series of decisions meant to increase the businesses' market impact, rather than eliminate it.
“I’m worried, I think that lawmakers will be worried,” said Andy Winkler, a researcher at the American Action Forum. “I don’t know if that will push them to get housing finance reform done, but I think it should,” Winkler said.
The Federal Housing Finance Agency is proposing to increase the number of home loans for people in low-income areas and for people in multifamily housing such as condos and townhouses. The goals, which the agency is required by law to set, are for the years 2015-2017.
Coupled with a decision by new FHFA Director Mel Watt earlier in the year to cancel an increase in the fee it charges for government insurance on mortgages — a move that will ease credit terms — Friday’s announcement concerns Winkler.
“The overall tone shift from shrinking the government-sponsored enterprises to maintaining broad access has conservatives worried,” Winkler said.
Norbert Michel, a research fellow at the Heritage Foundation, told the Washington Examiner that the goals announced Friday were not as sweeping as he thought they might be, but that the course charted out by Watt entailed “more of the same until these institutions are completely dealt with.”
In a major speech in May, Watt announced that he would be redirecting the agencies' mission from shrinking Fannie and Freddie's market footprint toward expanding mortgage credit.
There’s “not a chance anyone’s going to do major reform before the elections” this year, or even until after the presidential election in 2016, Michel warned.
American Enterprise Institute scholar Edward Pinto thought that Friday's proposal was an effort by the FHFA to boost its affordable housing goals without retreading the path toward lending to unqualified individuals that doomed Fannie and Freddie in 2008, by framing the goals in terms of lending to areas defined by low-income rather than to low-income families. “The overarching goal or strategy is they want affordable housing goals,” Pinto told the Examiner. “They want to increase those.”
In addition to affordable housing goals, Pinto claimed, the FHFA under Watt hopes to expand mortgage credit by “jawboning lenders and insurers” to lend to all borrowers who would meet the terms offered by Fannie and Freddie.
In recent years, lenders have imposed even stricter credit terms for home loans than Fannie and Freddie require, in part because they fear that if those loans go bad in the future, they will be forced to purchase the money-losing loans back from the two enterprises — or even be sued for fraud.
“The problem is that private lenders are damned if they do and damned if they don’t” broaden lending to borrowers with less than perfect credit, Pinto said.
In recent months, top economic policymakers such as Federal Reserve Chairwoman Janet Yellen have warned that tight mortgage credit may be preventing some people from buying homes, which is slowing the housing recovery.
Pinto and other researchers at the American Enterprise Institute created an index to measure the underlying risk involved in mortgages guaranteed by the government. Their National Mortgage Risk Index shows that loans for home purchases backed by Fannie and Freddie are not half as risky as they were in 2007, as the housing bubble collapsed. Yet they are at the limit of riskiness that the AEI researchers consider conducive to a stable market.
It’s clear, though, that the terms required by Fannie and Freddie have become much more strict in the wake of the subprime mortgage crisis. Two-thirds of Fannie Mae-backed 30-year, fixed-mortgages made between 2011-2013 went to borrowers with FICO scores above 750, according to the Urban Institute. In 2005-2006, only a little more than one-third did. So far, the cumulative default rate on those mortgages is lower than it was during the pre-bubble years.
The White House has mostly stayed on the sidelines of the debate over how to replace Fannie and Freddie, although it has expressed support for a bipartisan bill that cleared the Senate Banking Committee in May that would replace them with a system of private insurance with a government backstop. That legislation failed to gather enough support to win passage in the Senate.
Republicans on the House Financial Services Committee also passed a bill to overhaul the two government-sponsored enterprises and the Federal Housing Administration in summer 2013, but that measure has not gained traction with the broader chamber either.