A New Political Reality for Housing Finance

There are less than 40 days from the inauguration of the 45th President of the United Sates, and as our 44th President winds down his final days in office a huge part of his legacy is the health of our economy. Last month’s jobs’ report and this week’s remarks by Federal Reserve Chairwoman, Janet Yellen, underscores what many economists have noted as President Obama’s perfect gift to the next President - a healthy and growing economy. Nonetheless, there is more work in these final days that can be done to address the paralysis in the secondary housing market.

The Great Recession of 2008 had a painful and enduring impact on the American Dream and for millions of working families, particularly low and moderate income families, those effects remain not in the so distance future. Today homeownership remains at a 50-year low and for African-Americans the pain has been especially acute. Only about 41 percent of African-Americans own a home, compared to 72 percent of whites. Working families still find it way too difficult to afford decent rental housing, and are spending increasingly more money to provide decent housing to their families.

Amid fears that the government sponsored enterprises (GSEs) would become insolvent in the 2008 crisis, understandably they were placed in conservatorship under the supervision of their regulator the Federal Housing Finance Agency (FHFA). While they have been profitable for years, ending the conservatorship has been an impossible feat. The complexity of housing policy and a highly-charged political environment explain some of why this has dragged on for so long. But a major factor has been a policy shift that started in 2012 that diverts the profits of the GSEs to Treasury. The policy was conceived as a way to shrink the GSE’s role in housing finance but it has systematically depleted the enterprises of backup capital.

Arguably, without the GSEs, there would be no 30-year-fixed mortgage. Beyond the permanent countercyclical market function, Fannie and Freddie have a statutory duty-to-serve the very people the Administration says must be front-and-center in any new path forward in housing policy – low and moderate creditworthy borrowers. And as such, it is time to begin the process to end the conservatorship of the GSEs to allow them to fully-serve hardworking Americans; especially low and moderate income borrowers.

With the Administration’s renewed focus on a level playing field, it is more important than ever to begin the process of ending the conservatorship. Fortunately, a strong foundation for undertaking this action has already been laid. Under FHFA Director Mel Watt, Fannie and Freddie’s revenue no longer comes from risky investments involving borrowed money, as was the case on the eve of the 2008 crisis, but from reliable and stable guarantee fees. The companies have new management and boards and more prudent lending practices that focus on safety and soundness.

For most of this year, Director Watt has expressed his growing concern that Treasury’s claim on the GSEs’ revenues is putting them at risk and making it more likely taxpayer support would be needed to cover shortfall. The prospect of another “bailout” would be politically explosive and unsettling to markets. Freddie’s earnings for the third quarter of 2016 were $2.3 billion. Fannie’s were $3.2 billion. To provide more certainty in the market, it’s time to end the next dividend payment and allow the GSEs to build a true capital buffer.

While I am no cheerleader for investors, the alternative of waiting and leaving the fate of access and affordability to homeownership in the hands of a Republican-led Congress and Executive Branch, when the current Administration can act now is outrageously shortsighted. Moreover, the many scenarios at play for the GSEs while they remain without capital would be bad news for aspiring homebuyers. It could also hasten the enterprises’ draw on credit lines Treasury mandated for them, thus politicizing a long-term reform strategy for the GSEs even more.

The Treasury Secretary-designate, Steve Mnuchin, stated in his first interview that “we gotta get Fannie and Freddie out of government ownership.” Mnuchin ultimately believes that privatization is the final path to reform. While I wholeheartedly agree that it’s time, after more than seven years, to end the conservatorship of the GSEs I also believe it’s critically important to preserve the essential market function and duty-to-serve missions of Fannie and Freddie. Director Watt should not wait until the next Administration to begin the process of ending the conservatorship - he can do that by simply halting the next dividend payment.

It’s time to restore the American Dream of homeownership and allow the GSEs to rebuild their capital buffers.

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