Last week’s Senate action to eliminate filibusters for most presidential nominees, which effectively lowers the number of votes required for the confirmation of most presidential appointees, clears the way for Rep. Mel Watt (D-N.C.) to be approved as the director of the Federal Housing Finance Agency. It also opens the door for the immediate reform of the U.S. housing finance system.
The Senate’s action is timely. Fannie Mae and Freddie Mac, the two mortgage giants that were taken into government conservatorship in 2008, are once again two of the most profitable financial firms in the U.S. with second quarter net pre-tax earnings of $8.7 Billion and $6.5 billion respectively. And both companies are close to repaying the government an amount equal to their respective bailout financing.
Yet while the earnings are flowing at Fannie Mae and Freddie Mac, the housing market is struggling. Six years into the housing crisis and four years after the end of the Great Recession, homeownership is fading as an achievable American Dream for millions of families.
The Federal Housing Finance Agency (FHFA), that was established to regulate Fannie Mae and Freddie Mac in the depths of the housing market’s collapse, continues to manage the firms as if the two were a continuing risks to the American taxpayers. The result is unnecessarily rigid credit standards and excessive fees that together are denying creditworthy families access to affordable home loans and stifling the housing market’s recovery.
In fact, most of the loan originations, more than 70 percent for more than the past year, processed by Fannie Mae and Freddie Mac, are from refinancing existing mortgages rather than from purchasing homes. While refinancing lowers the cost of borrowing to current owners and generates earnings for participating lenders, it does not expand homeownership which is essential for a healthy housing market.
Equally important, the current refinancing frenzy has a fragile foundation; it is contingent upon near historically low interest rates directly resulting from Federal Reserve stimulus monetary policy. Those policies will, at some point change, and rates will go up.
In recent weeks, Congress has begun to focus on restructuring the housing finance system. Bills have been introduced by Rep. Jeb Hensarling (R-Texas) on the House side and Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Via.) on the Senate side. And a draft bill has been offered by Sens Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho).
The one feature common to all of these pieces of legislation is the elimination of Fannie Mae and Freddie Mac. In reality, however, no new housing finance legislation is likely to pass both Houses of Congress prior to next year’s mid-term elections. Add to that equation the time it would take to actually stand up the new system after its enactment and a timeframe of five years is not unreasonable.
But there is no reason to wait to reform the housing finance system.
A recent paper sponsored by The Opportunity Agenda, National Fair Housing Alliance and National Association of Real Estate Brokers, reviews the 10 key goals for housing finance and administrative steps needed to accomplish those goals. Major goals include setting aside appropriate reserves for future losses to protect taxpayers from future bailouts, limiting risk taking within the system, enhancing mortgage servicer standards, improving loan affordability and ensuring access to credit for affordable rental housing construction.
But a change in leadership for the FHFA could bring immediate major housing finance reform that better protects taxpayers from future bailouts while reopening access to the conventional housing finance market to young families, rural residents, lower-income and low-wealth households and borrowers of color. As a result, the confirmation of Mel Watt as its new director could immediately take steps to achieve long-overdue and badly needed reform of the housing finance system.
Carr is a distinguished scholar with The Opportunity Agenda and senior fellow with the Center for American Progress. He is also a former executive with Fannie Mae and director of Tax Policy and Federal Credit with the U.S. Senate Budget Committee.