Why conservatorship of Fannie and Freddie must end

Working people need access to responsible and sustainable mortgage loans

Recently, in the pages of HousingWire and elsewhere, housing policy consultant Barry Zigas has called into question the motives of affordable housing and civil rights groups advocating for ending the conservatorship of Fannie Mae and Freddie Mac and suggested that ending their conservatorship is Wall Street’s preferred solution.

This is deeply ironic given the fact that the Johnson-Crapo framework for housing finance reform Zigas supports is favored and backed by Wall Street banks. Those who live in glass houses shouldn’t throw stones, especially when they are just wrong.

Let’s first address why the National Community Reinvestment Coalition has been so deeply engaged in this conversation and debate about the fate of Fannie Mae and Freddie Mac.

NCRC’s sole purpose in the housing finance reform debate, from which we have never wavered, is to make sure that working people have access to responsible and sustainable mortgage loans. It is nonsense and disingenuous to suggest that the hedge funds involved in this debate have any influence on us whatsoever.

The fate of the Fannie and Freddie investors is not our concern. We are concerned about what happens to communities. And what is happening right now is that the future ability of working class families to obtain responsible home loans is in serious jeopardy.

The stakes are high.

The best option for communities at this juncture is to recapitalize Fannie and Freddie, end their conservatorship, and continue the reforms of the entities begun with the Housing and Economic Act. It’s essential that this administration act now to begin to undertake these steps.

There seems to be the notion, coming from Zigas and others, that the GSEs can just sit in conservatorship until “the stars align” for the passage of a perfect comprehensive legislative solution.

This is a deeply flawed assumption, for several reasons. Even Federal Housing Finance Agency Director Mel Watt, who oversees the conservatorship, has conceded that “…staying in conservatorship is just not sustainable.”

Advocates for an indefinite conservatorship don’t acknowledge that Fannie and Freddie are on a path to being dismantled. They are literally winding down.

The Federal Housing Finance Agency’s Office of the Inspector General observed that the GSEs may not be able to sustain profitability as they wind down their investment portfolios, eliminate their capital cushion, and so on. Mel Watt has also opined that the GSEs may not be able to attract qualified staff moving forward. As Fannie and Freddie wind down, the risk that they will have to draw on government funds, which could create a shock to the market, increases precipitously.

As Josh Rosner, Glen Corso and others have pointed out (see Industry Pulse, page 64), the conservatorship is having a real chilling effect on the activities of the GSEs, and has resulted in an excessive tightening of credit.

There is also the simple fact that for most of their history, when Fannie and Freddie were not under conservatorship, they did a significantly better job securitizing responsible loans to working Americans, including families of modest means.

The GSEs would also be operating in a much-improved regulatory environment and a more safe and sound financial system by virtue of the Dodd-Frank reforms.

The GSEs have been reformed themselves as well: HERA included significant reforms to the GSEs’ regulator, their capital standards, their portfolio limits and their prudential management and operations. 

It’s worth noting that all of the uncertainties that Zigas raises about liquidity, cost, and so on, are uncertainties that would also exist, and indeed would be even greater in the case of a brand new system in the form of the Johnson-Crapo framework.

 Zigas himself has acknowledged that the cost of mortgages would rise under the Johnson-Crapo model.

In the case of Fannie and Freddie, they have a proven track record of doing a very good job at creating broad access to responsible loans for most of their history. That’s a lot more to go on than a nebulous hope for comprehensive legislative reform down the road that would put in place something that’s completely untried and untested.

Fannie and Freddie also already have critically important affordable housing goals, which have not been included in any of the legislation to replace the GSEs. The goals
help to make sure that all creditworthy borrowers have access to responsible mortgage credit – whether they are in urban or rural communities, or moderate-income or low-income communities.

None of the legislative proposals to gain serious congressional consideration have included affordable housing goals. The proposal that was the foundation for the Johnson-Crapo legislation stated that “Neither the Public Guarantor nor MBS issuers should be subject to numerical housing goals or quotas.” 

 In that way alone, all of these legislative proposals have been inferior to our existing system.

Gretchen Morgenson of The New York Times recently put a spotlight on Wall Street banks’ efforts to “muscle out” Fannie and Freddie.

She noted that there has been a considerable revolving door between the industry and Obama administration housing posts. It’s clear that there is a well-organized, orchestrated effort to reconstitute the housing finance system in a new shape that mainly benefits Wall Street banks and doesn’t do nearly enough to help working communities.

Does handing over Fannie and Freddie’s role to Wall Street institutions, whose reckless and abusive practices included securitizing millions of unsafe, unsound unsustainable predatory mortgages, sound like a good idea to you?

For all of these reasons, at this juncture, many affordable housing advocates look at this picture and see the need for immediate action to preserve Fannie, Freddie, the public mission in their charters, and their affordable housing goals.

While some seem content to kick the can down the road and hope it turns to gold, we are not. The big question: is the Obama Administration?

Inaction on the conservatorship could be remembered in the annals of history as a very bad decision.Homeownership is the single most common way working-class Americans build equity and wealth. Let’s not unwittingly undermine this proven system by eliminating Fannie and Freddie and the affordable housing goals.

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