This spring, the Community Home Lenders Association (CHLA) hosted a roundtable in Washington, D.C., on federal government mortgage programs and their role in ensuring access to credit and affordable homeownership. This included a discussion on government mortgage programs and government-sponsored enterprises (GSEs) focusing on mortgage lending since the housing crisis of 2008.
The roundtable covered the financial performance and risks of these programs and the central role they have played in promoting access to mortgage credit since the crisis. This discussion took place at time when major reforms are being considered for the nation’s housing policy. Mortgage originators whose livelihoods depend on a healthy housing market should pay close attention to these maneuverings.
As Congress and the administration debate housing policy, what is needed is a solid framework for understanding the proper role of government programs in our mortgage markets. Housing policies should be based on balancing the dual objectives of facilitating mortgage access to credit and limiting taxpayer risk, using objective evidence.
Stabilized housing market
Over the last decade, we have witnessed major changes in the composition of our mortgage markets. Many banks significantly withdrew from mortgage lending and correspondent mortgage banking. The private label securities market generates random deals here and there, but is still nowhere close to providing a reliable source of affordable mortgage financing.
In the face of this retrenchment, it was government mortgage programs and GSEs that stabilized the housing market and, in the process, saved our nation’s economy. Over the last several years, these programs have accounted for roughly 70 percent of newly originated mortgage loans, down only slightly from levels of over 80 percent in the first few years after the 2008 housing crisis.
Many groups, such as the American Enterprise Institute, argue that this is not healthy or sustainable and have called for direct actions to reduce the government footprint in our mortgage markets. Others, citing their importance to our housing markets, argue against dramatic changes designed to roll back their role in mortgage lending. For example, the Center for Responsible Lending (CRL), in a May 2018 report, argues that the Federal Housing Administration (FHA) “has been and remains central in creating homeownership opportunities for borrowers of color, low- to moderate-income borrowers, and lower-wealth borrowers.”
The contention that government programs are crowding out private lending is based on the premise that if these programs retrenched, private lenders would step in to pick up the slack. This may be a laudable goal — but such an approach should not be employed unless we have objective evidence that this will actually occur if we take certain specific steps to raise fees or curtail lending in the programs. The housing market and the economy are just too important to leave this to chance.
Alternatively, if the goal is to reduce the government footprint, then reducing the footprint of Fannie and Freddie won’t accomplish that if the result is that borrowers merely gravitate instead to FHA loans. With regard to FHA, it is important to analyze which loans are being eliminated, since changes that primarily eliminate good quality loans might create adverse selection or reduce revenues at a faster pace than losses.
For example, some have argued that the “life of loan” policy — a requirement for mortgage insurance premiums for the duration of some loans — put in place six years ago by FHA has played a major role in FHA’s dramatic decline in refinance retention rates, which translate into lower revenues in FHA’s annual Actuarial Report.
Moreover, if the goal is simply to bring private capital back into the market, there may be other ways to accomplish that goal. One of the major reforms Fannie and Freddie have made in recent years is to utilize risk sharing on almost all of their new loan purchases. This approach brings in private capital, reduces taxpayer risk and increases market discipline.
Another important part of this debate is to have an objective discussion about the financial performance of these programs and the risk they pose to tax-payers. The simple idea that government mortgage programs represent the only mortgage risk to taxpayers was somewhat clouded by the experience of the housing crisis.
As we remember, Congress had to approve $700 billion in funding to help stabilize our nation’s banks, and the Federal Reserve provided an $85 billion bridge loan for AIG and a commitment to cover up to $30 billion in losses to facilitate the JP Morgan rescue of Bear Stearns. Fannie and Freddie were not unaffected by the crisis, as their conservatorship and a $190 billion advance from the federal government demonstrates. Since then, the two GSEs have not only paid back their advance, but also generated over $75 billion in combined profits for taxpayers.
FHA, too, felt the effects of the crisis, falling below its statutory net worth requirement. FHA has since replenished its reserves and net worth and generates $7 billion a year in net profits to taxpayers, according to U.S. Department of Housing and Urban Development budgets. For its part, Ginnie Mae was consistently profitable through the worst of the crisis, generating almost $10 billion in cumulative net profits for taxpayers over the last decade.
Finally, some question whether federal mortgage programs can keep up with technological and market developments. FHA Commissioner Brian Montgomery has called attention to FHA’s outdated technology, and recent Ginnie Mae presidents have raised concerns about Ginnie Mae’s significant growth in both the volume of its securities being issued and its number of issuers.
To be sure, both agencies are taking steps to improve program performance. In recent years FHA has developed its “taxonomy” of loan defects to create more clarity and transparency for loan originators — to augment FHA indemnification policies which impose financial penalties on loans that don’t meet FHA underwriting standards. Ginnie Mae has taken a number of recent actions to improve super-vision, such as prohibitions against U.S. Department of Veterans Affairs refinance churning and stress testing for the largest issuers, which represent the bulk of the risk for Ginnie Mae.
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These are clearly complicated issues. As Congress and the administration grapple with mortgage policies, however, it is not just those of us who work in the mortgage and real estate industry who should care. The 2008 housing crisis taught us that all Americans have a stake in getting this right.