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Credit Access and Mortgage Finance Reform

May 08, 2017

In late April, 2017 I was invited to participate in a panel on affordability issues in mortgage finance reform at a New York workshop sponsored by the Federal Reserve Banks of New York and Atlanta, the Federal Reserve Board, the Wharton School at University of Pennsylvania, and UCLA's Anderson School of Management. I summarized what I think are the critical pillars of a mortgage finance system, which I’ve edited into the bullets below.  Four colleagues and I expanded on the need for and an approach to affordability in mortgage finance reform in January as part of our series of essays describing A More Promising Road to GSE Reform, which can be downloaded through the link.

Assure that entities that use government support do not “cream” the market

This first point seems obvious and hard to oppose – a mortgage finance regime supported by the government should not be allowed to exclude credit worthy borrowers or reduce liquidity for primary market lenders serving these communities without good cause.  At a minimum, the book of business at these entities should reflect the distribution of loans being originated across income, race and other characteristics.  This is the central, original purpose of the housing goals.  Yes, they are imperfect and sometimes have been misused.  But you cannot assess what you cannot measure.  Some form of bench-marking, whether imposed by the government regulator based on market research and projection, or by the entities themselves using market data and economic projections approved by a regulator as some have suggested, is needed to monitor guarantors’ performance.  Fannie and Freddie have been under a revised housing goals regime since coming under conservatorship in 2008 and the HERA revisions and a de-politicized goals process have improved them.  In fact, GSE credit terms are significantly tighter than in the early 2000's under this regime, a continuing issue that still needs to be addressed.

Create a mandate for “leading the market” into new areas through research, pilots, and partnerships that extend secondary market liquidity responsibly

But matching the market is not enough.  The government’s support for these entities should include an obligation to use the secondary market’s central role in the marketplace to responsibly expand credit.  This is what the often-abused term “lead the market” means to me.  This “duty to serve” requirement was adopted in the 2008 HERA GSE amendments to focus attention on three specific market sectors – rural housing, manufactured housing and affordable housing preservation. Fannie and Freddie published their first proposed DTS plans under this provision on May 8.  What was speculative in 2013 has become an operating reality.  It should not be cast aside as reform discussions move forward.

Charge a fee on government backed MBS to support market expanding activities and contribute to support for low income rental assistance programs

Finally, reform should include a fee on all government backed MBS in the form of a strip collected every year on outstanding securities.  These proceeds should fund the market expanding efforts in the duty to serve, through risk sharing on new, untested products, on helping to create additional effective demand from consumers, and so on, as well as housing and community development funding outside of the mortgage finance system.  Fannie and Freddie's DTS plans should show further examples of how the GSEs can help develop and prove new markets. The GSEs today already pay an assessment on each year’s business to fund the Housing Trust Fund and Capital Magnet Fund, this year amounting to $455 million.  Shifting this volume-based one-time fee to a yearly ongoing strip will provide a significantly larger and more reliable source to continue that funding in addition to the market expanding efforts in the duty to serve. 

The Promising Road proposal I co-authored and the MBA’s new effort both envision some form of this combination of requirements in a future system.  The recent Milken Institute proposal includes the fee in the form of a 10 basis point strip -- as did the ill-fated Johnson-Crapo legislation in 2014 --  and suggests further elaboration in a later paper. These features are already required under conservatorship.  Reform should maintain and improve them.  Without these or similar requirements that blend quantitative measures of broad service to the market, an expectation that enterprises benefiting from a federal guarantee will help lead the market into new opportunities, and funding to support such work through a fee, reform could easily wind up sponsoring mortgage credit in ways that exclude households and communities from its benefits, an unacceptable outcome.


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