Late this month – July 30 – marks the 14-year anniversary of President George W. Bush, a Republican President, signing into law the HERA legislation, developed under a Democratic-controlled Congress.
HERA established a process for conservatorship of Fannie Mae and Freddie Mac, created FHFA as a first-class regulator, and codified GSE mission provisions like the Housing Trust Fund, Duty to Serve, and Housing Goals.
Many are disappointed that Fannie and Freddie are still in conservatorship 14 years later. At the same time, from my perspective as a top House Financial Services Committee housing staffer that worked on the HERA legislation at that time, I think it is important to remind people how well-crafted HERA was and how well it has served taxpayers, homeowners, and our nation’s housing markets.
Withstanding the test of time
When HERA was signed into law, few people envisioned that its conservatorship authority would be invoked just 39 days later — but it was. Fortunately, HERA’s de novo conservatorship provisions designed to deal with this contingency have more than withstood the test of time.
The immediate impact was to stabilize financial markets in turmoil. The conservatorship facilitated the HAMP program that enabled 645,000 GSE distressed borrowers to save their home through loan modifications and the HARP program that enabled 3.5 million underwater borrowers to lower their mortgage rate.
A 2015 report by the New York Federal Reserve found that “Our overall conclusion is that conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress.”
Addressing major risk characteristics
Longer term, HERA and conservatorship reforms have addressed the major risk characteristics of the pre-2008 version of the GSEs credit risk transfers that are being used to transfer risk away from taxpayers and to provide market discipline — a kind of early warning sign if the GSEs are going off the rails. Loan portfolios have been dramatically slashed, ending the significant pre-HERA Fannie/Freddie interest rate risk exposure. And the GSEs have their own version of the Dodd-Frank Qualified Mortgage (QM), which generally outlaws no doc, no income loans, a major contributor to the GSEs’ conservatorship.
Fannie and Freddie fulfilling their housing mission
At the same time, Fannie and Freddie have hit the sweet spot of both performing well financially and fulfilling their housing mission. Fannie and Freddie were an essential source of mortgage credit for the housing recovery from the 2008 subprime mortgage crisis.
Under conservatorship, Fannie and Freddie paid back their Treasury advances and generated an additional $110 billion in profits for American taxpayers. A few years ago, FHFA restarted the process of letting the GSEs retain profits to build up their net worth to provide a buffer against economic downturns.
An important HERA provision was the creation and funding of the Housing Trust Fund, the first significant affordable housing program since the housing tax credit program was created 22 years earlier. A small portion of GSE profits are allocated by the states for construction or substantial rehabilitation of affordable rental housing for the poorest of the poor. Since the program was turned on in 2016, $2.659 billion has been contributed by the Fannie and Freddie for the Housing Trust Fund.
Another HERA provision was the creation of Duty to Serve, which was based on the reality that the GSEs were able to meet their housing goals while ignoring certain profitable and critically important segments of the market, simply because they are lower volume activities that require the GSEs to roll up their sleeves a bit.
The three Duty to Serve market areas are manufactured housing, affordable housing preservation and rural housing. As a result, Fannie and Freddie now pay particular attention to these critical areas – which were often ignored before adoption of HERA.
GSE housing goals
Finally, there are GSE housing goals. Housing goals have been criticized from all sides of the political spectrum. But no, they did not cause the 2008 crisis — as some have claimed but every major study has rejected – and they don’t require the GSEs to buy bad loans or do social engineering.
They rest on the simple premise that Fannie and Freddie should not use a taxpayer backstop to cherry pick higher quality, higher income mortgage loans – but instead must predominately carry out their statutory mission requirement to serve low- and moderate-income homebuyers and renters.
Will the “timeout” end soon?
Looking forward, the great parlor game in Washington is when, if ever, Fannie and Freddie will exit conservatorship. At the time when they were put in conservatorship, Treasury Secretary Paulson called it a “timeout.” That is one heck of a time out!
And one that apparently will not end soon. The reason is simple. We seem to be waiting on Congress — but Congress is plagued by legislative gridlock — and detailed legislation is not the best way to address the complexities about how Fannie and Freddie should operate and be regulated post-conservatorship.
In fact, it is not essential for Congress to enact legislation. HERA includes the tools for the conservator (FHFA) to take Fannie and Freddie out of conservatorship.
My personal opinion is that the best approach is for Fannie and Freddie to exit conservatorship under a true utility model using the housing mission tools of HERA, a vigilant FHFA that makes sure the GSEs do not take on dangerous levels of risk to maximize shareholder profit, and an explicit federal backstop to establish MBS investor confidence.
But there are good faith differences of opinion on many key issues, including how to resolve the government’s preferred stock holding. So, it is understandable that no FHFA Director over the last 14 years has taken Fannie and Freddie out of conservatorship, in the absence of consensus and Congressional guidance.
The best way for this to happen is for Congress to hold extensive hearings to develop a bi-partisan consensus on how to move forward — and then have FHFA use its authority under HERA to act.
Or not. Many in Washington think the conservatorship is working well and believe there is no urgency for Fannie and Freddie to exit conservatorship.
Either way, 14 years later, HERA still provides a sound foundation for making this critical part of our housing finance system work effectively. It would be nice if all federal legislation were that successful.
Scott Olson was the Housing Policy Director for the House Financial Services Committee in 2008 – and is currently the Executive Director of the Community Home Lenders Association (CHLA)
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Scott Olson at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]