PROJECTHousing Finance Reform Incubator

Concluding Remarks

July 11, 2016

With today’s publication of concluding remarks from 11 participants in our Housing Finance Reform Incubator (below), we bring our project to a close. When we started, we hoped to provide an outlet for concise, accessible statements of the most recent thinking on housing finance reform—including multifamily finance and access and affordability—from a wide variety of perspectives. With 19 essays from 26 authors, we believe we have accomplished this goal. 

In addition to the concluding remarks, we are publishing a single document compiling all the essays and concluding remarks. We want to thank all the incubator authors for their hard work and good ideas. Thanks also to Sheryl Pardo, the Housing Finance Policy Center’s director of communications; the Urban Institute communications team, especially David Hinson; and the funders whose support enables the Housing Finance Policy Center to pursue projects like this. We hope these essays will provide useful background and a good primer about the future shape of US housing finance as the discussion heats up over the next several years.


Tim Howard

The large majority of the Urban Institute essays focus on fixing what their authors call the “perverse incentives” of Fannie and Freddie’s business structure. That’s the wrong problem. The companies’ incentive structure was good enough to enable them to produce and maintain a level of credit quality that was far higher than all other sources of mortgages before the crisis. Their real problem was insufficient capital. In a postcrisis world, credit guarantors should be required to hold enough capital that they will have only a miniscule chance of failure (or of triggering the government’s catastrophic risk guaranty), but not so much that the fees they have to charge are so high that the guarantors are unable to provide an acceptable amount of affordable financing for the low- and moderate-income homebuyers Fannie and Freddie were chartered to serve.

Only a few essayists—myself, John Taylor, and Mike Calhoun and Sarah Wolff—addressed this balance between capital and affordability. Most authors either were silent on the amount of capital their proposed systems would require, or gave a capital percentage with no explanation of its derivation. And no author addressed how the capital requirements and structure of their proposed credit guaranty system would affect the mortgage rates quoted to different classes of borrower; in fact, most did no more than state that their proposed systems would be good for affordable housing because the guarantors would be given housing goals. But housing goals will not have much effect if guarantors have no practical way to turn them into business they actually can finance.

The essayists have done the easy part of their task—coming up with ideas for the guarantor’s business structure. Now they must do the hard part: determine how much capital credit guarantors should hold and why that’s the right amount, devise a guaranty mechanism that is the best way to provide financing to as wide a range of borrowers at as low a cost as possible, and, if there is a significant transition from the current system to the envisioned one, explain how that would work in practice.

Read Tim Howard's essay.

Alex J. Pollock

Housing Finance: Two Strikes, and Now?

Memories fade, so while trying to draw conclusions about going forward, we should also do our best to remember our past expensive lessons in politicized housing finance.

It should be most sobering to Americans engaged in mortgage lending that the U.S. housing finance sector collapsed twice in three decades—a pretty dismal record. There was first the collapse of the savings and loan-based system in the 1980s, then again that of the Fannie Mae and Freddie Mac-based system in the 2000s. The first also caused the failure of the government’s Federal Savings and Loan Insurance Corporation; the second forced the government to admit that the U.S. Treasury really was on the hook for the massive debt of Fannie and Freddie, frequent protestations to the contrary notwithstanding. The first generated a taxpayer bailout of $150 billion; the second a taxpayer bailout of $187 billion. That’s two strikes. Are we naturally incompetent at housing finance?

In both cases, the principal housing finance actors had tight political ties to the government, which allowed them to run up risk while claiming a sacred housing mission. The old U.S. League for Savings, the trade association for savings and loans, was in its day a serious political force and closely linked with the Federal Home Loan Bank Board. In their glory days, in turn, Fannie and Freddie bestrode the Washington and the housing worlds like a hyper-leveraged colossus. In retrospect, these were warning signs.

The savings and loans did what the regulators told them to do: make long-term, fixed rate mortgage loans financed short. Fannie and Freddie were viewed as a solution to this interest rate risk problem, then had a credit risk disaster instead. They, too, did what the regulators told them to do: acquire a lot of lower credit quality loans. Thinking that regulators know what risks will come home to roost in the future is another warning sign.

We need to eschew all politicized schemes and move to something more like a real housing finance market, if we want to avoid strike three.

Read Alex J. Pollock's essay.

Mark Calabria

Mark Twain is credited with saying, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” He could easily have been talking about the American mortgage finance system. Current debates are heavily focused on who can build the better mouse trap, without asking whether we should be catching this particular mouse or not. Many commentators assert we cannot have a functioning mortgage system without extensive government guarantees, despite the evidence to the contrary. Many assume our current securitization-based system has delivered broad gains in homeownership and affordability, again despite the evidence otherwise.

The single biggest problem confronting mortgage finance reform is that the consensus assumptions simply are not supported by the objective evidence. While I can sympathize with the desire to “get back to business,” pretending the crisis didn’t happen or that Dodd-Frank actually fixed the flaws, is just kicking the can down the road. The business cycle in American history has long been driven by the housing cycle. Attempts after each bust to renew the boom with increased leverage and weaken underwriting have occasionally brought short-term relief but at great long-term cost. One reason this bust was so bad was we finally reached the limits of increased leverage; it’s difficult to reduce down payments below zero.

If we hope to build a sustainable, affordable, and reliable mortgage finance system, then we must recognize that a few tweaks will not do. We must also recognize that the greatest drivers of housing unaffordability have little to do with the mortgage market. In fact, by increasing housing demand without increasing supply, mortgage subsidies actually make housing more expensive, not less. What is keeping homeownership out of reach for low-income and poor-credit families is not the mortgage market; it’s high home prices and low incomes. Those are the issues we should be addressing.

Read Mark Calabria's essay.

Ethan Handelman and Shekar Narasimhan

Putting Affordability at the Center of Housing Finance

Incubator authors apparently agree America needs a stable and liquid housing finance system and that a government catastrophic backstop is necessary, but many disagree about mechanisms and which participants should play the largest role. Only by focusing on housing affordability can we create the housing finance system to serve renters and homeowners at all times nationwide.

From a multifamily perspective, we observe:

1.       Multifamily needs a separate solution from single-family. An explicit, priced, and limited federal guarantee is essential for well-functioning multifamily and single-family secondary markets. The implementation of the guarantee should be different for the two sectors, because multifamily’s proven models rely on distinct securities from different issuers. Spinning off multifamily, leaving room for new entrants, and putting private capital ahead of government can work, as Berman and Willis detail.

2.       Multifamily should welcome more lenders and reach underserved communities. There are only 29 multifamily lenders fully approved to work with Fannie Mae and Freddie Mac. From our observations, none is a minority- or women-owned business or a community-based bank. These lenders generally do an excellent job, so the system would benefit from more competition. We should lower barriers to entry to encourage the primary market to reach more underserved and new American communities, while maintaining credit quality.

3.       The secondary market should support affordability. That is the quid pro quo for the government guaranty. There was a near consensus that those who benefit from the secondary market should contribute to affordable housing solutions. Dissenting opinions did not convince us: neither Bibby and DeWitt nor Pollock mention targeted affordability, while Pinto sketches a radical and unworkable restructuring of all housing finance and development.

We care about housing finance reform to ensure everyone can afford a place to call home. Providing a stable, well-functioning system for profitable businesses run by skilled professionals is essential, but not an end in itself. Our housing finance system should help markets reach as many people as possible and provide resources to address needs where the market underperforms.

Read Ethan Handelman and Shekar Narasimhan's essay.

Michael D. Berman and Mark A. Willis

Multifamily GSE Reform

Of the three essays exclusively focused on reform of the GSE multifamily businesses, ours was the most granular (the other two were authored by Narasimhan and Handelman and by Bibby and DeWitt). Nevertheless, there is general agreement that multifamily lending is different from single-family and should have a different reform approach that retains the successful features of the multifamily business units of Fannie Mae and Freddie Mac while mitigating flaws. We agree that the new system should preserve the strengths of the existing risk-sharing models, promote competition, protect taxpayers, retain the features that maintain market liquidity through the economic cycle, and strengthen regulatory oversight, including support for creating and maintaining affordable and workforce housing.

  1. We appear to agree to creation of new regulated bond guarantors, two of which would be spun out and grandfathered from Fannie Mae and Freddie Mac’s multifamily businesses.

  • Ownership of guarantors by the private sector

  • FHFA to regulate the guarantors as mono-line businesses

  • Explicit government guarantee (e.g., GNMA) only for MBS investors’ principal and interest

  1. We appear to agree to strong protection for taxpayers

  • Strict loan eligibility criteria prescribed by FHFA

  • Sale of top-loss risk to third parties (including Fannie Mae DUS lenders)

  • Minimum capital requirements for guarantors

  • Government to charge guarantee fee for a reserve fund

  1. We appear to agree on setting standards for

  • annual production percentage for units renting at different levels of affordability to focus activity of guarantors on affordable and workforce housing,

  • limiting portfolio size, and

  • overall market share for the guarantors.

There is a strong basis for building consensus among these authors. However, more detail is needed to determine the extent of agreement on minimum level of capitalization of guarantors, broad access of small banks to the system, specific duty-to-serve mandates, the level of a market share cap, funding of the HERA affordable housing funds with a fee charged on all loans in the system, transition to the new system regarding the old book of business, and how to handle capital requirements in times of extreme economic stress.

Read Michael D. Berman and Mark A Willis's essay.

Doug Bibby and Bob DeWitt

Our Take-away: Everyone Agrees Multifamily Works

All of us recognize that Fannie Mae and Freddie Mac’s multifamily programs maintained solid underwriting standards and strong credit performance even during the global financial crisis and, importantly, kept capital flowing to our sector even in the depths of that crisis. Moreover, the GSEs’ multifamily programs today feature characteristics that advocates of reform are seeking, including robust taxpayer protections, increased private capital participation, risk sharing, a limited government role, and a mandate to serve all markets at all times.

While their programs continue to operate soundly and provide much-needed capital to our industry as we try and meet the gap between historic apartment demand and the existing apartment supply, we cannot take it for granted that that will continue to be the case. The inability of the GSEs to build capital reserves as required in the Senior Preferred Stock Purchase Agreement may trigger a rush to reform them in 2018 when their reserves are exhausted.

The greatest current threat to the multifamily industry is poorly designed and executed GSE reform. The fact is that Fannie Mae and Freddie Mac’s multifamily programs are a critical capital provider and participate alongside private capital sources to support a well-functioning marketplace for multifamily borrowers. GSE reform that destabilizes the presently healthy market must be avoided. We support GSE reform that builds on the proven, successful elements of today’s system and promotes rental housing for all Americans.

Read Doug Bibby and Bob DeWitt's essay.

Barry Zigas

The collected essays make it both easier and harder to understand eight years of gridlock on reform. Harder because the essays show so much alignment around core principles. Easier because some outliers either reject or significantly reduce a federal role in broad housing finance, or will not venture beyond the current model that has little political support. These persistent voices encourage political resistance to any change, making finding a way forward more difficult despite consensus on important issues from diverse quarters.

Several essays effectively laid out the critical reasons for making broad consumer mortgage credit access a key outcome, but mostly offered no way to do so besides retaining the current housing goals model. But focusing only on “fixing” the GSE model in isolation would waste the rare opportunity to erase artificial distinctions between different existing supports that could enable an integrated model of federal engagement in housing finance to more effectively assure broad credit access, as a few of the essays described.

Within the mix of recommended organizational models—utility, mutual, regulated shareholder, or government-owned corporation—lie consensus on key issues:

  1. A federal role to insure liquidity in the secondary market for mortgage credit availability throughout business cycles

  2. Limiting this role to providing paid-for, explicit guarantee on securities

  3. Leaving the majority of credit risk to private capital through one means or another and avoiding the creation or resurrection of “too-big-to-fail” institutions

  4. Insulating the goals of public benefits from the pressures of profit-seeking private ownership of the mortgage system’s critical infrastructure

  5. Eliminating Fannie and Freddie’s large portfolios in any new structure

  6. Considering a separate approach for necessary support for multifamily finance

  7. Equal access to the market for lenders of all sizes and types under any organizational model

These essays show we can take the GSEs another step on their long evolutionary journey. Building on this consensus to integrate their most important features and outcomes with other federal tools including regulation of primary market lenders would make real change and create more opportunity to fulfill access objectives more effectively.

Read Barry Zigas's essay.

John Taylor

It is encouraging to see almost universal consensus in this forum around the importance of affordable housing requirements, with several essays reaffirming a central role for one or all of the following: affordable housing goals, a duty to serve, the National Housing Trust Fund, and the Capital Magnet Fund. All of these elements must be in place, including strengthened affordable housing goals. There was also broad acknowledgement that today’s credit standards and the substantial increase in the cost of credit postcrisis are undermining access for many qualified LMI and minority borrowers. I believe that today’s credit access conditions for LMI communities and communities of color reflect a weakening of the nation’s commitment to affordable housing and affirmative obligations on financial institutions to serve these communities. While some proposals are stronger than others, this incubator reflects a watershed in the conversation around housing finance reform in that so many saw affordable housing mandates as of central importance.

 The spectrum of structural reforms to the housing finance system proposed in this forum magnifies how great the disagreement is over next steps: eliminate the GSEs and return to the “originate-and-hold” model; merge the GSEs into one government corporation or transfer them to Ginnie Mae; reconstitute the GSEs as a mutual-owned or shareholder-owned utility; or recapitalize the GSEs and continue reforming them—the best approach in our view. These wide policy differences also reflect the current political reality—there is not consensus. More political and policy uncertainty is ahead about what approach a new administration will take and how the protracted conservatorship will affect the GSEs’ future earnings, their ability to carry out their affordable housing mission—lackluster currently, by all estimations—and the secondary mortgage market overall.

 With regards to homeownership, the proposals and analysis offered by Marc MorialMike Calhoun and Sarah Wolff, and Janet Murguía most closely dovetail with NCRC’s, and Tim Howard’s proposal also reflects a lot of wisdom and is worthy of further review and consideration. Overall, I am encouraged by the movement of so many on the necessity of clear and strong affordable housing mandates.

Read John Taylor's essay.

A photo of Laurie Goodman. Dark hair, glasses, bright smile.
Tim Howard
A photo of Jim Millstein. White hair, slight smile, suit and tie.
A photo of Alex Pollock. Slight smile, suit and tie.
A photo of Mark Zandi. Slight smile, suit, brown hair.
A photo of James Carr. Severe smile, suit, dark hair.
A photo of Andrew Davidson. Slgiht smile, greying hair, glasses.
A photo of Mark Calabria. Slight smile, suit, dark hair, glasses.
A photo of Patricia Mosser. Dark hair, glasses, bright smile.
A photo of Marc Morial. Big smile, suit, dark hair.
A photo of Laurie Goodman. Dark hair, glasses, bright smile.
A photo of three individuals. All three are smiling, have suits, ties, and dark hair.
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A photo of two individuals. Both are smiling, have suits, ties, and glasses.
A photo of two individuals. Both are smiling, have suits, and ties.
A photo of Jim Millstein outside. Dark hair, big smile, suit and tie, glasses.
A photo of Pinto. White hair, glasses, slight smile, suit.
A photo of Taylor. White hair, suit.
Mike Calhoun and Sarah Wolff
Rodrigo Lopez and Debra Still
Janet Murguía
Jim Parrott
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Research Areas Housing finance
Policy Centers Housing Finance Policy Center