In the waning days of the first Trump administration, the US Department of the Treasury amended the terms of the Preferred Stock Purchase Agreements (PSPAs), which set the requirements that Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs), must meet to receive financial support. The amended terms limited the share of “high-risk” mortgages, second homes, and investor properties the GSEs could purchase. These changes did not last long, as the Biden administration suspended them shortly after taking office.
As Trump reenters the White House, our analysis shows that if these limits are reinstated, they would severely constrain renters seeking to buy their first home—renters who are already struggling with high prices and high interest rates. Had the limits been enforced under the Biden administration, a significant share of new homebuyers would not have been able to obtain a loan. Given that current GSE lending poses little risk to the safety and soundness of the market overall, these limits are likely to do more harm than good by constraining access to credit for potential homebuyers, exacerbating existing barriers and racial and socioeconomic homeownership gaps.
What were the suspended limitations?
If the Biden administration had not suspended the PSPA limitations, the new terms would have limited the GSE purchases of “high-risk” single-family loans to 6 percent of their purchase mortgages and 3 percent of their refinance mortgages. The Treasury defined a high-risk loan as having at least two of the following three characteristics:
- the loan covers more than 90 percent of the home value (i.e., has a loan-to-value, or LTV, ratio above 90 percent)
- the borrower’s debt exceeds 45 percent of their income (i.e., has a debt-to-income, or DTI, ratio above 45 percent)
- the borrower’s credit score is below 680
This “high risk” classification oversimplifies risk, as strengths in one characteristic can outweigh weaknesses in other characteristics. When approving a borrower, the GSEs use sophisticated underwriting models that take a holistic view of the borrower’s ability to repay. The loans the GSEs do approve pass this more sophisticated scoring, further aided by full documentation of income and assets.
In addition, the Treasury limited the share of second homes and investor properties to 7 percent of single-family GSE acquisitions. These ceilings were to be measured as 52-week moving averages.
When proposed, the caps were set at levels consistent with the 2020 rate of high-risk and non-owner-occupied loans. But rising interest rates and rising home prices have led to an increase in loans having the characteristics laid out above.
How have the GSEs’ new acquisitions changed since 2020?
The most recent data regarding high-risk purchase loans show that the 52-week rolling average is 10.3 percent, the highest mark since 2013 when detailed loan-level data became available. The prior peak was 9.2 percent in 2018, another period of high interest rates. Since then, the high-risk purchase share has generally stayed above 6 percent, falling below that threshold only during the low-rate period of 2020 and 2021, when the new terms were set.
The increase in the share of high-risk mortgages mostly reflects an increasing share of loans with high DTI ratios. Across each of the three high-risk characteristics, the share of loans with credit scores below 680 and with LTV ratios greater than 90 percent have remained consistent while the share of loans with DTI ratios above 45 percent jumped from 11 percent in 2020 to roughly 25 percent over the past few years.
Although the limitations on purchase loans risk decreasing borrowers’ access to credit in the current housing market, the proposed caps are less restrictive for refinance loans. The share of high-risk refinance loans cannot exceed 3 percent, which is roughly equal to the current levels.
The limitations also required that the share of investor and second-home properties not exceed 7 percent, but increases to the loan-level pricing adjustments for second homes and investor properties in May 2023 meant that more of these properties went to the non-agency securities market and fewer went to the GSEs. As a result, the 12-month moving average of investor properties and second homes sits below 7 percent.
Reinstating the caps now would hinder future housing opportunities
Many expect the incoming administration to consider reimposing the caps on high-risk, second-home, and investor property loans, but we believe doing so would constrain access to credit in a counterproductive manner, making homebuying more difficult. The GSEs have less risk now than they did before the financial crisis in the early 2000s. Serious delinquencies (loans that are 90 or more days delinquent) have fallen as documentation standards have become more stringent, with delinquencies now lower than they were before the COVID-19 pandemic.
Moreover, improvements in the loss mitigation waterfall have significantly decreased the rate at which borrowers move from serious delinquency to foreclosure. Urban Institute research has shown expected losses are 46 percent lower than earlier data would have indicated.
Lastly, the GSEs are offloading a substantial amount of their risk through credit risk transfer transactions (PDF), which have transferred a significant share of GSE credit risk to private investors. In all, the amount of credit risk the GSEs have taken on is dramatically lower, so it doesn’t make sense to reimpose caps that might have been useful before the financial crisis but would be detrimental for the future.
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