In early March of this year, in response to the pandemic-induced economic shutdown, Congress gave borrowers with government-backed mortgages the right to forbearance and placed a moratorium on foreclosures. As a result, lenders, servicers and investors, skittish that they would be left holding nonperforming loans, made it dramatically more difficult to qualify for a mortgage. Mortgage rates surged and, for a brief period, home sales paused. It looked like a return of the late-2000s foreclosure crisis.
However, on April 22, 2020, the real estate industry caught a break. The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—could purchase mortgages in forbearance. The FHFA also made accommodations on appraisals to account for concerns that appraisers, homeowners and closing agents had over face-to-face interactions. Within a week, the Federal Reserve Board announced that it would purchase mortgage-backed securities (MBS) made by Fannie Mae and Freddie Mac, causing mortgage rates to fall to pre-crisis levels. In May, home sales rebounded and housing became—and remains—one of the bright spots in a sluggish American economy.
Fannie Mae and Freddie Mac are at the center of this activity because they are critical to the American mortgage system. They purchase loans from mortgage lenders that meet sound criteria, which allows mortgage lenders to provide affordable, 30-year, fixed-rate mortgages anywhere in the country.
In the mid-2000s, this cycle was broken when the GSEs started buying MBSs from private issuers who had incorporated predatory, subprime mortgages with harsh lending terms, and who had masked their disregard for a homebuyer’s borrowing capacity. This led to toxic MBSs, with underlying mortgages often ending in foreclosure, and investors left soured on American homeownership.
In the wake of this crisis, the Federal government moved to place the GSEs into conservatorship in order to ensure they could continue to buy mortgages and play the role they had always been intended to play in America’s housing market. Simultaneously, the FHFA implemented reforms to make the GSEs and the market less risky. This oversight led to the revitalization of America’s home-buying market, and has eventually allowed Fannie Mae and Freddie Mac to repay more than $300 billion to the U.S. Treasury to date.
Our nation was again reminded of the GSEs importance to our housing market and overall economy in the wake of this pandemic. By moving to buy mortgages in forbearance, providing flexibilities on appraisals and ensuring the availability of affordable payment plans after forbearance, among other measures, the GSEs proved this.
The strong role of the GSEs’ regulator, FHFA, must be preserved to continue the responsiveness to economic conditions, but the GSEs should not continue in conservatorship indefinitely. The National Association of REALTORS® (NAR) recognizes the value of returning Fannie Mae and Freddie Mac back to private shareholders, while retaining strong oversight. As proposed by NAR, private shareholders will spur the GSEs to maximize efficiency and innovation. But as history has also proven, the value of a guiding hand must not be overlooked. The NAR vision of locking-in the GSEs as the market utilities they are functioning as today strikes the right balance.
Under NAR’s proposal for market utilities, the GSEs would be re-chartered as privately-held utilities that pay dividends but remain subject to government oversight for their products, rates and operations to ensure they are complying with their mission while protecting taxpayers. This proposal is the reasonable response to the GSE’s longstanding value to the American mortgage system.
In fact, it’s the only rational future for Fannie Mae and Freddie Mac. NAR will continue to educate lawmakers in Washington, D.C., about the importance of the GSEs to the stability of the housing market and to share NAR’s vision for reform. For more information, go to www.nar.realtor/fannie-mae-freddie-mac-gses.
Bernard Fulton is NAR’s senior policy representative for financial services. For more information, please visit www.nar.realtor.