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Bolstering GSEs Key to Future of Nation’s Housing Finance System
In contemplating the future status of housing government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, NAHB on June 3 told Congress it is critical for the federal government to provide a backstop to the housing finance system to ensure a reliable and adequate flow of affordable housing credit.
Testifying before the House Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, NAHB Chairman Joe Robson said that NAHB supports changes to the structure and operations of Fannie Mae and Freddie Mac to enable them to support mortgage market liquidity and address affordable housing finance needs without creating excessive taxpayer risk.
“NAHB believes that the federal backstop must be a permanent fixture in order to ensure a consistent supply of mortgage liquidity, as well as to allow rapid and effective responses to market dislocations and crises. It has been clearly demonstrated that the private sector, unaided, is not capable of consistently fulfilling this role,” said Robson.
“Fannie Mae and Freddie Mac should be recast, retaining federal backing but limited primarily to providing credit enhancement of mortgage-backed securities,” he added. “Limited portfolio capacity should be permitted to accommodate mortgages and housing-related investments that do not have a secondary market outlet, although Fannie Mae and Freddie Mac should have the flexibility to support the mortgage market in times of crisis, such as the conditions we are currently experiencing.”
NAHB outlined several principles for federal government support and structure of the housing finance system:
- The federal government must provide a permanent backstop to the housing finance system in order to ensure available and affordable mortgage credit in all geographic areas and under all economic circumstances.
- Secondary market entities (Fannie Mae, Freddie Mac and the Federal Home Loan Banks) should retain sufficient federal backing to allow them to reduce mortgage rates and fees.
- Fannie Mae and Freddie Mac should focus on the core business of securitizing mortgages and limited portfolio capacity should be permitted to accommodate mortgage and housing-related investments that do not have a secondary market outlet, including acquisition, development and construction (AD&C) loans.
- Fannie Mae and Freddie Mac must have the authority and ability to provide reliable liquidity to the mortgage markets during times of stress — which requires flexibility in terms of portfolio composition and size over the mortgage credit cycle — or with changing conditions in the secondary mortgage markets.
- Secondary market entities must be adequately capitalized.
- The secondary market must have a private sector component with risk shared by participants/shareholders, with governance by a board that includes public interest, housing industry and shareholder representatives.
- Flexibility in pursuing new mortgage programs and products should be balanced with accountability and safety and soundness.
Robson stressed that these changes should not proceed until the current financial turmoil passes and the markets return to more normal conditions.
At the present time, he called on Fannie Mae and Freddie Mac to roll back changes in single-family and multifamily underwriting requirements that are resulting in the denial of credit to viable borrowers and projects and impeding the economic recovery.
“We urge the committee to direct the Federal Housing Finance Agency (FHFA) and the GSEs to take the interim steps of eliminating the risk-based delivery fees for their mortgage purchase programs introduced since August 2007,” said Robson. “Elimination of these fees will directly increase mortgage affordability, enhance policymakers’ attempts to reduce foreclosures and help the country get back on the road to economic recovery.”
Noting that Fannie Mae has implemented changes to its condominium project approval standards that have raised the pre-sale requirement to 70%, Robson urged the FHFA, as the regulator and conservator of the GSEs, to bring their condominium pre-sale requirements into line with the Federal Housing Administration's 50% pre-sale requirements. Failure to act, he cautioned, could “result in the denial of homeownership opportunities for thousands of prospective condominium purchasers and lead to financial ruin for innumerable condominium projects and developers.”
In addition, NAHB strongly recommends that the temporary loan purchase limit framework — enacted earlier this year under the American Recovery and Reinvestment Act of 2009 — be made permanent. The legislation restored the 2008 ceilings and local area loan limits for loans that can be purchased by Fannie Mae and Freddie Mac, up to a maximum of $729,750.
Photo by Morris Semiatin
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