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Home , Conforming loan, Fannie Mae, Federal Home Loan Banks, Freddie Mac

Fannie Mae, , and Housing Finance Reform By Sarah Saadian, Vice President of Although and Freddie Mac were Public Policy, NLIHC created at different times and for different purposes, they have had effectively identical See Also: For related information, refer to the charters and responsibilities since 1992. Prior National Housing Trust Fund: Funding section of to September 7, 2008, when they were placed in this guide. , they were privately owned and Fannie Mae and Freddie Mac, the two federally operated corporations. chartered companies that provide a secondary Fannie Mae and Freddie Mac do not provide market for residential mortgages, have been mortgage loans directly to individual borrowers. in conservatorship since September 7, 2008 Rather, they facilitate the secondary mortgage when the crisis precipitated a global market by buying loans from banks, savings financial meltdown. Much to the dismay of many, institutions, and other mortgage originators. the companies remain under the control of the Lenders then use the sale proceeds to engage in federal government because Congress cannot further mortgage lending. For the most part, the agree on a housing finance system. GSEs purchase single-family, 30-year fixed rate The “Housing and Economic Recovery Act of conventional mortgages that are not insured by 2008” (HERA) established an independent the federal government. They also play a major agency, the Federal Housing Finance Agency role in financing the multifamily housing market. (FHFA), to serve both as a regulator and to The GSEs either hold the mortgages they significantly strengthen federal oversight of purchase in their portfolios or package them Fannie Mae and Freddie Mac. HERA gave the into mortgage-backed securities (MBSs), which FHFA the power to take the companies into are sold to investors. When the GSEs securitize conservatorship if need be. HERA also created a mortgage, they are guaranteeing that those the national Housing Trust Fund (HTF) and the investors receive timely payment of principal Capital Magnet Fund (CMF). and interest. The GSEs charge mortgage lenders Because Fannie Mae and Freddie Mac provide a guarantee fee (g-fee), generally in the form the dedicated source of funding for the HTF, their of monthly payments, to cover projected status and viability are of particular interest to losses if a borrower defaults over the life of the low-income housing advocates. NLIHC supports loan. housing finance legislation that would provide The GSEs raise money in the capital markets to significant new funding for the HTF. fund their activities. Their incomes come from the difference between the interest they receive WHAT ARE FANNIE MAE AND on the mortgages they hold and the interest they FREDDIE MAC? pay on their debt, and from g-fees and income The Federal National Mortgage Association earned on non-mortgage investments. (Fannie Mae) and the Federal Home Loan Single-Family Mortgages Mortgage Corporation (Freddie Mac) are government sponsored enterprises, known as Single-family mortgages must meet certain GSEs. Congress established the GSEs to provide criteria set by the GSEs to be packaged and liquidity and create a for both sold as securities. As a result, the two GSEs single-family (one to four units) and multifamily set the lending standards for the conventional, (five or more units) residential mortgages. single-family mortgage market. This standardization increases the liquidity of

NATIONAL LOW INCOME HOUSING COALITION 3–15 mortgages meeting the GSE guidelines, thereby housing affordable to families with extremely low decreasing the interest rates on these mortgages incomes. and lowering costs for homebuyers. Duty-to-Serve Generally, the GSEs provide support for 30-year HERA also established a “duty-to-serve” for fixed-rate mortgages on single-family homes. the GSEs, which requires them to lead the Fannie Mae and Freddie Mac can only purchase industry in developing loan products and flexible mortgages with principal balances equal to or underwriting guidelines for manufactured less than the conforming loan limit established housing, affordable housing preservation, and annually by FHFA. The limit may also be adjusted rural markets. FHFA published its final rule in to account for the size of a . December 2016, which outlines the GSEs’ duty- Multifamily Mortgages to-serve. The GSEs also purchase mortgages on The final rule requires the GSEs to submit plans multifamily . These mortgages are for improving the “distribution and availability of generally held in portfolio, but they can be mortgage financing in a safe and sound manner securitized and sold to investors. In the past, for residential properties that serve very low-, the GSEs have also played a significant role in low-, and moderate-income families.” Each GSE is supporting the Low-Income Housing Tax Credit required to submit to FHFA a three-year duty-to- market. serve plan, detailing the activities and objectives it will use to meet the rule’s requirements. The Housing Goals final rule gives the GSEs duty-to-serve credit As GSEs, Fannie Mae and Freddie Mac are for eligible activities that facilitate a secondary required to achieve social goals as well assure market for residential mortgages that originated safety and soundness in the housing finance in underserved markets. The GSEs also receive system. In exchange for a once-implied, now duty-to-serve credit for qualifying activities explicit, federal guarantee, Congress has required that promote residential economic diversity in that the GSEs meet statutorily-based “housing underserved markets. The rule establishes the goals” to help assure affordable homes in the manner in which the GSEs would be evaluated U.S. The GSEs are required to purchase a certain for their efforts. FHFA is required to report number of mortgages on properties with specific evaluation findings to Congress annually. characteristics to ensure that low- and moderate- At the end of 2017, FHFA approved the GSEs’ income, underserved, and special affordable first underserved market plans. In their plans, markets are served. FHFA updates these goals the GSEs indicated that they would pursue periodically. additional activities to support inclusionary Substantial partisan disagreement remains housing programs, the preservation and lasting over the affordable housing goals and the role of affordability of rental properties, and economic the federal government in the housing market. integration. Progressives believe the goals are necessary to ensure that people with low incomes and FANNIE MAE, FREDDIE MAC, AND people of color have access to mortgage markets. THE HOUSING TRUST FUND Conservatives believe that the goals caused In HERA, Congress established that Fannie the GSEs to participate in overly risky business Mae and Freddie Mac would serve as the initial practices that triggered the foreclosure crisis. sources of funding for the HTF and the CMF. It is important to note that the multifamily side of Fannie Mae and Freddie Mac are required to the GSEs’ business did not sustain losses during set aside an amount equal to 4.2 basis points the crisis; unfortunately, the GSE multifamily for each dollar of total new business purchases. goals did not lead to the expansion of rental Note that the assessment is on their volume of

3–16 2021 ADVOCATES’ GUIDE business, not their profits. Of these amounts, 65% which bolstered the U.S. housing market. In is to go to the HTF and 35% is to go to the CMF. exchange, the U.S. government became the owner of the companies’ . Lawmakers reasoned that requiring Fannie Mae and Freddie Mac to set aside funds for the HTF In 2012, Fannie Mae and Freddie Mac returned was part of the GSEs’ mission responsibilities to profitability, and began to make dividend included in their charters. In addition to their payments to the Treasury. Under the conditions affordable housing goals, which could be met of the conservatorship agreement between through the regular course of business, funding Treasury and FHFA, all of Fannie Mae and the HTF allowed the GSEs to support housing that Freddie Mac’s profits outside of a $3 billion extremely low-income renters could afford, an buffer were “swept” into the U.S. Treasury. Under activity that is not possible through any of their FHFA director Mark Calabria, the GSEs are now business product. permitted to retain a combined $45 billion worth of earnings. The GSEs’ dividend payments now HERA allows FHFA to temporarily suspend the far exceed the $188 billion drawdown. requirement that the GSEs fund the HTF and the CMF under circumstances related to threats to In the last few years, there have been several their financial health. In November 2008, at the federal lawsuits in which investors who have height of the , the FHFA director speculated on Fannie Mae and Freddie Mac suspended this obligation before the GSEs even stock are trying to end the government sweep began setting aside funds. In 2014, FHFA Director of the GSEs’ profits. Hedge funds have taken a lifted the suspension and directed both gamble on investing in Fannie Mae and Freddie companies to begin setting aside the required Mac shares with the hope that the courts would amount starting on January 1, 2015. Since strike down the conservatorship agreement. 2016, nearly $2 billion has been invested in the The investors argue that the agreement violates HTF. This is an important start, but more HTF their rights as shareholders, as they have been resources are needed. barred from receiving company dividends. Some lawsuits have already been thrown out of court, FANNIE MAE AND FREDDIE MAC while others are pending. IN CONSERVATORSHIP Hedge funds and some civil rights and consumer Before the financial crisis, Fannie Mae and advocacy groups have been pushed the Trump Freddie Mac had never received any federal Administration and FHFA to recapitalize and funds to support their operations. However, release the GSEs from conservatorship. They both companies incurred huge financial have authored several proposals, some that losses because of the foreclosure crisis. This would provide funding for the HTF. Although the prompted Congress to place the companies hedge funds stand to reap financial gains through in conservatorship under the FHFA. Today, “recap and release,” the civil rights and consumer FHFA has all the authority of each company’s advocacy organizations argue that the indefinite directors, officers, and shareholders. Until conservatorship has created uncertainty in the the conservatorship ends, FHFA operates the mortgage market, leading mortgages lenders companies through appointed management in to tighten their credit standards in a way that each company. During conservatorship the GSEs disproportionately impacts racial minority remain critically important to the housing finance homebuyers. They also contend that without system by providing liquidity for new mortgages, recap and release, Fannie Mae and Freddie Mac’s helping to resolve the mortgage crisis, and financial health will deteriorate, jeopardizing supporting the multifamily market. their obligation to contribute to the HTF. Under an agreement between the Department of However, recap and release will not necessarily the Treasury and FHFA, the GSEs together were increase affordable lending and does not allowed to draw up to $200 billion to stay afloat,

NATIONAL LOW INCOME HOUSING COALITION 3–17 move Congress any closer to passing housing Affairs Chair Tim Johnson (D-SD) and Ranking finance reform legislation, which promises Member Mike Crapo (R-ID) that was introduced in to generate billions of new dollars for rental the spring of 2014. The Johnson-Crapo measure housing affordable to families with extremely low would have replaced the GSEs with a new FMIC. incomes. To be eligible for reinsurance under the FMIC, any security must have first secured private HOUSING FINANCE REFORM capital in a 10% minimum first loss position. The PROPOSALS bill also established a new platform Almost a decade after the financial crisis, policy to create a standardized security to be used for makers are still grappling with how to reform all securities guaranteed by the new system. the housing finance market. Because of these The securitization platform would have been philosophical differences, Members of Congress regulated by the FMIC. have reached a stalemate in pushing legislative The bill included a 10-basis point user fee to fund proposals forward. Although many Members of the HTF, the CMF, and the new MAF. The fee was Congress and numerous analysts and pundits projected to generate $5 billion a year, and 75% have wanted to end the , wind of the funds would go to the HTF. Even though the down Fannie Mae and Freddie Mac, and establish bill also got rid of the affordable housing goals, a new model for the secondary mortgage market, it included a new flex fee or market incentive to all efforts to do so to date have been unsuccessful. encourage mortgage guarantors and aggregators There was considerable legislative activity on to do business in underserved areas. housing finance reform in the 113th Congress The Johnson-Crapo bill also provided for a (2013-2014), even though no legislation was secondary market for multifamily housing. It considered by either the full House or Senate. allowed for the Fannie Mae and Freddie Mac Efforts to reform the housing finance system will multifamily activities to be spun off from the continue in 2021. new system established by the bill. The bill would have required that at least 60% of the Johnson-Crapo multifamily units securitized must be affordable In 2013, Senators Bob Corker (R-TN) and Mark for low-income households (80% AMI or less). Warner (D-VA) introduced the “Housing Finance The bill would have also created a pilot program Reform and Taxpayer Protection Act” (S. 1217), to promote small (50 or fewer units) multifamily which laid out a plan to wind down Fannie development. Mae and Freddie Mac and replace them with a The Johnson-Crapo bill was voted out of the Federal Corporation (FMIC), Senate Banking Committee on May 15, 2014 modeled after the Federal Depository Insurance by a bipartisan vote of 13-9. The Obama Corporation. The FMIC would have offered an Administration fully endorsed the bill but the explicit government guarantee, purchased and bill was criticized by the right and the left for securitized single and multifamily mortgage doing too much or not enough to assure access to portfolios, and provided regulatory oversight of mortgages to all creditworthy borrowers, and was the . The bill would never taken up by the full Senate. have assessed a 5-10 basis point user fee on all guaranteed securities that would be used to fund Delaney-Carney-Himes the HTF, the CMF, and a new Market Access Fund Representatives John Delaney (D-MD), John (MAF). The bill would have abolished affordable Carney (D-DE), and Jim Himes (D-CT) introduced housing goals. the “Partnership to Strengthen Homeownership The Corker-Warner bill provided the framework Act” (H.R. 5055) in 2014, which would have for legislation subsequently offered by Senate wound down Fannie Mae and Freddie Mac Committee on Banking, Housing, and Urban over a five-year period and created a mortgage

3–18 2021 ADVOCATES’ GUIDE insurance program run through the Government created a new regulator, the National Mortgage National Mortgage Association (Ginnie Mae). Finance Administration. Under the bill, private Ginnie Mae would become a stand-alone agency, capital would have to have been in a first loss no longer part of HUD. Fannie Mae and Freddie position to reduce taxpayer risk. Mac would eventually be sold off as private The “HOME Forward Act” would have preserved institutions without any government support. Fannie Mae and Freddie Mac’s multifamily The bill would have provided a full government business and transferred it to a new multifamily guarantee on qualifying mortgage securities platform at the MSC. The bill also assessed a backed by mortgages that meet certain eligibility 10-basis point user fee to fund the HTF, the CMF, criteria. As proposed, private capital would have and the MAF. The bill was never introduced. had a minimum 5% first-loss risk position. The “Protecting American Taxpayers and remaining risk would have been split between Homeowners (PATH) Act” Ginnie Mae and private reinsurers, with private capital covering at least 10% of losses. Fannie Former Congressman Jeb Hensarling (R-TX) Mae and Freddie Mac’s multifamily activities introduced the “Protecting American Taxpayers would have been spun off and privatized and and Homeowners (PATH) Act” (H.R. 2767) in received a government guarantee through Ginnie 2013. The bill called for a five-year phase out Mae. of Fannie Mae and Freddie Mac. As part of this wind-down, the bill would have repealed the In return for insuring securities, Ginnie Mae authorization of the current affordable housing would have charged a fee of 10 basis points on goals, as well as the HTF and CMF. The bill would the total principal balance of insured mortgages. have established a new non-government, non- The bill would apply 75% of this fee revenue to profit National Mortgage Market Utility (Utility) the HTF, 15% to the CMF, and 10% to the MAF. that would have been regulated by FHFA and This is identical to how the Johnson-Crapo and required to think of and develop common best Waters (below) bills treat the HTF. However, practice standards for the private origination, unlike other the other bills, this measure would servicing, pooling, and securitizing of mortgages. have added Federal Housing Administration The Utility would have also operated a publicly (FHA), Department of Agriculture (USDA), accessible securitization outlet to match loan and Veterans Affairs (VA) mortgages in the originators with investors. The Utility would determining the base upon which the 10-basis not have been allowed to originate, service, or point fee is assessed, generating an additional $1 guarantee any mortgage or MBS. billion. The bill would have also made changes to FHA, “Housing Opportunities Move the Economy including making it a separate agency, no longer (HOME) Forward Act” part of HUD. The bill would have limited FHA’s Congresswoman (D-CA) released activities to first-time homebuyers with any draft housing finance reform legislation, the income and low and moderate-income borrowers “Housing Opportunities Move the Economy and would have lowered the FHA conforming (HOME) Forward Act,” in 2014. The measure loan limit for high-cost areas. The bill was voted would have wound down Fannie Mae and Freddie out of the Committee on Mac over a five-year period and replaced them July 23, 2013, by a partisan vote of 30-27. Two with a newly created lender-owned cooperative, Republicans and all Democrats opposed the bill. the Mortgage Securities Cooperative (MSC). The bill was not taken up by the full House and The MSC would have been the only entity that was blocked by then Speaker of the House John could issue government guaranteed securities Boehner (R-OH). It was opposed by virtually every and would have been lender-capitalized based segment of the housing industry. on mortgage volume. The bill would have also “Bipartisan Housing Finance Reform Act of 2018”

NATIONAL LOW INCOME HOUSING COALITION 3–19 Representatives Hensarling, Delaney, and WHAT TO SAY TO LEGISLATORS Himes released draft legislation to reform the nation’s housing finance system in 2018. This Fannie Mae and Freddie Mac play important proposal provided an affordability fee that could roles in both the single-family and the affordable contribute to an overall increase in funding multifamily markets. These functions, as well dedicated to affordable housing. While NLIHC as the contributions to the HTF, need to be part appreciated the authors’ stated commitment of any future secondary market. The HTF must to “substantial funding in support of existing be retained and funded in any future housing programs that contribute to the development of finance system. the supply of affordable housing options for low- With respect to the potential housing finance income individuals and communities, such as reform proposals, advocates should urge their the Housing Trust Fund and the Capital Magnet legislators to: Fund,” we were concerned with the lack of details • Oppose any legislation that would eliminate or about the size of the fee and the uses for the prohibit funding for the HTF. funds generated. While the draft bill provided few details on how much funding would be provided • Support legislation that provides robust to the HTF, the authors specifically identified funding for the HTF similar to the Johnson- the HTF as a possible recipient of such funds. Crapo and Waters and Delaney-Carney-Himes Moreover, the bill was unclear about the size of bills. the assessment. NLIHC opposes the draft bill’s • Support housing finance reform legislation suggestion that dedicated funds be on budget, that assures access to the market for all and instead NLIHC urges lawmakers to ensure creditworthy borrowers, as well as assuring that HTF funding remains separate from the compliance with federal fair housing laws. appropriations process. Funding for the HTF must be part of a FOR MORE INFORMATION broader commitment to ensuring access and Federal Housing Finance Agency, www.fhfa.gov. affordability throughout the housing market. Federal Home Loan Mortgage Corporation, www. The draft legislation, however, would repeal fanniemae.com. the system’s current affordable housing goals without providing anything in its place. This Federal National Mortgage Association, www. is unacceptable; housing finance reform must freddiemac.com. include enforceable and measurable mechanisms to ensure that access to credit is enjoyed by all segments of the housing market.

HOUSING FINANCE REFORM IN THE 117TH CONGRESS NLIHC will continue to advocate for comprehensive reform, since it offers the best chance of substantial new funding for HTF in the coming years. When Congress does finally tackle housing finance reform, it is critical that low-income housing advocates remain vigilant and protect the gains made in the Johnson-Crapo, Waters, and Delaney-Carney-Himes bills to robustly fund the HTF.

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