The FHFA Has a Small Window to Enact a Policy to Create a More Equitable Housing Finance System
Immediately after the US Supreme Court ruled that the president has the authority to replace the Federal Housing Finance Agency (FHFA) director, President Biden appointed Sandra Thompson as acting director.
Why the urgency? The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have a hand in nearly three in five (PDF) home mortgages and set key parameters for the broader mortgage market. Under the Trump administration, the FHFA director focused on releasing the GSEs from their FHFA conservatorship. The Biden administration has signaled it will instead shift focus to use the FHFA’s oversight to address widening racial inequities and lack of affordable housing.
One way the FHFA could accomplish this is by extending and redirecting an expiring fee on GSE loans imposed by Congress in the Temporary Payroll Tax Cut Continuation Act of 2011 [PDF] (TCCA) and using the funds that could ramp up over time to at least $5 billion a year to help advance the administration’s broad underserved markets priorities, including reducing the racial and socioeconomic homeownership gaps. But if the FHFA opts to go this route, it must act quickly, because the TCCA is set to expire on October 1.
The FHFA is on the clock. What are its options?
To pay for a two-month extension of the “payroll tax holiday” in 2012, the TCCA imposed an annual 10 basis-point (0.1 percent) fee increase on all single-family mortgages acquired by the GSEs on or after April 1, 2012. But unlike other single-family guarantee fees, which are retained by the GSEs, the proceeds from this fee increase are remitted to the US Department of the Treasury at the end of each quarter, through October 1, 2021. In 2020, Fannie Mae (PDF) and Freddie Mac (PDF) delivered $4.5 billion in such fees to the Treasury.
Now, the FHFA and the White House have three options for handling the expiring TCCA mortgage fee:
- Do nothing. Fannie Mae and Freddie Mac would continue to charge the fee on new loans but would retain the proceeds, resulting in billions of dollars in new revenues.
Allowing the GSEs to keep this additional revenue would increase the ongoing portion of their average single-family guarantee fee by about 23 percent, from 43 to 53 basis points. Because the federal government provides financial support to the GSEs while they are in conservatorship, the government’s ownership stake in Fannie Mae and Freddie Mac would also rise dollar for dollar.
And under a separate agreement, the proceeds from the 10 basis-point fee on the outstanding balances of mortgages purchased or guaranteed during the 10-year window would continue to go to the Treasury until those loans are paid off or otherwise liquidated.
- Reduce guarantee fees by 10 basis points on new mortgages originated after October 1. This would have no impact on Fannie Mae and Freddie Mac revenues, retained earnings, or returns on capital. By my estimates, it would reduce the monthly cost on a $250,000 30-year conventional fixed-rate mortgage by about $21 a month.
- Retain the 10 basis-point expired TCCA fee in the guarantee fee and direct the GSEs to dedicate the proceeds to furthering their own and the administration’s affordable housing and underserved markets priorities.
What are the implications of each option?
Option 1 would accelerate the pace of Fannie Mae and Freddie Mac’s capital build to enable them to exit conservatorship more quickly, which contradicts the Biden administration’s goals. Moreover, raising effective guarantee fees absent increases in risk exposure, expanding market liquidity, or introducing new programs or products could pose charter (PDF) challenges as to the permissible limits of GSE pricing. On the other hand, there is no statutory requirement that limits their fee-setting abilities to cover just credit risk. Section 303(b) (PDF) of Fannie Mae’s charter, for example, permits non-risk-related activities to be included in its pricing, with an expectation that all costs and expenses be fully self-supporting.
This leaves options 2 and 3, both of which involve policy trade-offs.
Option 2—reducing guarantee fees by the amount of the TCCA increase—would provide a modest benefit to millions of families buying or refinancing their home with a Fannie Mae or Freddie Mac mortgage. At prevailing historically low interest rates (the average rate on 30-year fixed-rate mortgages was 2.9 percent on July 8), this would lower the rate to 2.8 percent. To put this discount in perspective, in the normal course of market dynamics, it’s common to see monthly mortgage interest rates swing 10 basis points or more. This occurred four times in 2019, two times in 2020, and twice already in the first six months of this year.
Option 3—preserving the 10 basis-point fee—would use the proceeds to substantially expand Fannie Mae and Freddie Mac’s affordable housing and underserved markets charter obligations without changing mortgage costs. But it would require future middle- and upper-income Fannie Mae and Freddie Mac borrowers to forgo a modest mortgage discount to help support more extensive efforts to address the nation’s intensifying affordable housing crisis, including narrowing the homeownership and wealth gaps for people of color.
Option 3 requires the greatest lead time, and the clock is ticking. The FHFA would have to give the GSEs guidance for deepening their underserved markets activities by an order of magnitude, work with them to develop enhanced affordable lending strategies, and assess and adjust their financial operating requirements accordingly.
To create affordable housing resources, the FHFA must act quickly
Option 3 aligns most closely with the administration’s goals and Fannie Mae and Freddie Mac’s affordable housing missions. It could also help remedy the historical federal housing policy tilt that benefits high-income homeownersand the federal government’s complicity in creating and perpetuating homeownership deficits for people of color.
Absent immediate action, the administration will lose a critical opportunity to create an ongoing source of affordable housing resources. These resources could be an enduring and sustainable complement to additional rescue and recovery packages Congress might approve in the coming months.
Finally, to the extent to which expanding Fannie Mae and Freddie Mac’s affordable housing roles would increase their exposure, retaining the 10 basis-point fee can cover the enhanced costs of implementing a broader equity program, including any increased credit risk.
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