In a written memo late last month, President Trump directed the heads of various federal agencies—primarily the Treasury and Department of Housing and Urban Development secretaries—to consider changes to the housing finance system. While the president’s memorandum appears to favor leaving many aspects of the current system intact, it has significant potential for damaging housing opportunities for low- and moderate-income communities.
Frequently short on detail, the memo takes a broad view of the housing finance system. Rather than focusing on Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) alone, it also considers the roles of the Federal Housing Administration (FHA), Ginnie Mae, and the Federal Home Loan Banks. Thinking through systemic reform that encompasses the whole system is a wise approach.
Unfortunately, the ideas woven into this broader scope start to illustrate problems with the memo. First, the lack of discussion of the liquidity function that the GSEs provide is concerning. By focusing on taxpayer bailouts, the guidance in the memo seems to encourage retrenchment during downturns that could exacerbate house price declines rather than ensuring deep and liquid markets, as intended by the GSE charters.
Another striking gap: The memo says little about financing for multifamily properties, especially those that serve low- and moderate-income families. Given the shorter duration and non-fully amortizing nature of most multifamily mortgages, liquidity throughout market cycles for these properties is vital. Yet there is no language in the memo recognizing how multifamily finance differs from single-family finance—notably private capital at risk from the first dollar of loss—nor is there guidance to the secretaries tasked with defining what the memo calls the “appropriate” roles of the GSEs and FHA in this space.
Multifamily finance is crucial to producing and preserving equitable and resilient affordable housing, and significantly, the GSEs’ multifamily performed very well during the housing crisis—Fannie Mae and Freddie Mac’s 60-plus day delinquency rates peaked at 0.71% and 0.26% in 2010. With such little mention of the needs of the more than one-third of households who rent, the memo seems to suggest that these 43 million households are unimportant and instead “mak[ing] affordable homeownership for American families [the] benchmark for success.”
Next, on the homeownership front, the memo’s call “to ensure that the FHA and GNMA assume primary responsibility for providing housing finance support to low- and moderate-income families that cannot be fulfilled through traditional underwriting” raises a number of red flags.
Affordable housing is currently a core part of the GSEs’ missions, but suggesting that the FHA and Ginnie Mae assume “primary responsibility” will likely reduce requirements that the GSEs ensure broad mortgage access and affordable products. That kind of shift would introduce the possibility of a two-tiered market with minimal overlap between FHA and the GSEs. In practice, it could mean that FHA ends up with sole responsibility for this market segment, and the GSEs would serve only borrowers with the highest credit scores.
This would be a mistake.
Such an approach implies that there should be bright lines about which entities serve which borrowers and that those guidelines should remain consistent over time, rather than encouraging competition to serve these borrowers or recognizing that credit conditions and pricing vary over the business cycle. It could also lead to problems in other areas, raising fair housing concerns and risking cutting access to affordable homes for underserved borrowers and low-income communities.
Rather than relegating those borrowers solely to FHA, where taxpayers are not protected by a private capital buffer, we must ensure that there is more risk borne by private capital and wider internal cross-subsidization. This is beneficial to those borrowers and the system as a whole.
We need a system that will continue to deliver access to affordable mortgages to creditworthy low- and moderate-income borrowers for homeownership and to the owners of properties that provide rental homes to families at affordable prices, with and without subsidy.
Affordable homes provide a more stable financial foundation for families with limited budgets, connecting them to community and opportunity and freeing up resources to avoid impossible tradeoffs between paying for housing and paying for other basic necessities like health care and transportation. The memo from the White House creates dangerous uncertainty for the future of the housing finance system. To support low-and moderate-income communities and affordable housing providers we must preserve and expand the GSEs’ (and any future actors’) role in supporting access to affordable mortgages for hard-to-serve borrowers and communities.
