In 2008, Fannie Mae and Freddie Mac (the GSEs) were put under “conservatorship,” or control of the federal government. The significant deterioration in the housing markets leading up to the 2007 – 2008 global financial crisis damaged each GSE’s financial condition and left them unable to fulfill their missions without government intervention.
Since that time, the Federal Housing Finance Agency (FHFA) has made executive decisions for the GSEs, including modifications to the terms of the U.S. Treasury’s monetary support for the institutions, known as preferred stock purchase agreements (PSPAs). While the conservatorship has helped stabilize the housing markets over the past decade, recent changes to the PSPAs in January 2021 put unnecessary limits on the GSEs’ ability to support a national housing market under all conditions and support underserved communities.
The January update included a 3% limit on the share of the GSEs’ portfolios that can be devoted to borrowers with multiple risk factors, like first-time homebuyers or those in underserved communities. Likewise, the agreement imposed a 7% cap on GSEs’ purchases of second home and investor properties. The GSEs already screen and price for risks in these loans, but of greater concern is that the GSEs use the more than $1 billion in annual profits from small investor loans to support first-time buyers and underserved borrowers. With second home and investor loans making up between 7% to 12% of the market since 2008, this particular cap will limit the GSEs’ profits and ability to support both the second home and underserved markets.
In response to the changes, National Association of REALTORS® (NAR) President Charlie Oppler stressed to FHFA earlier this year that “any considerations to limit financing on second homes, investor properties or entry-level borrowers will have a negative impact on borrowing costs and a broader impact on the rental market… [undermining] the GSEs’ ability to fund many of their charter duties and appropriately serve U.S. taxpayers and consumers.”
The impact is even more expansive, though. The GSEs produce mortgage-backed securities (MBS) with a guarantee, but their main inputs are whole loans from smaller lenders or MBS created by large lenders. The January amendments limit the portfolio share of whole loans the GSEs purchase from any one lender to 1.5%. This change gives an advantage to large lenders who sell MBS to the GSEs. As a result, this change could narrow the supply of lenders over time.
Because the PSPAs are an agreement between the FHFA and Treasury, both agencies must agree to any changes. Former FHFA Director Mark Calabria, who implemented the January amendment, appeared unlikely to agree to changes. However, Director Calabria was removed after the Supreme Court ruled on June 23, 2021, that the FHFA’s single-director structure is unconstitutional (Collins v. Yellen). Subsequently, President Biden named Sandra Thompson the agency’s Acting Director who may be amenable to ameliorate, pause or eliminate the problematic changes.
NAR will continue to work with the FHFA, Treasury, Administration and Congress to minimize disruption to all markets. For more information, visit www.nar.realtor/fannie-mae-freddie-mac-gses.
Ken Fears is NAR’s senior policy representative for Housing Finance Policy.