Fannie Mae and Freddie Mac may stop offering certain mortgages as they prepare to privatize, but borrowers won’t be left behind, the companies’ chief regulator said Monday.
When the Trump administration released its plans for housing finance reform in September, one key element was to identify overlaps between the loan products offered by Fannie and Freddie and those insured by the Federal Housing Administration.
‘Fannie and Freddie must not repeat the mistakes of the crisis by stretching to serve borrowers who are better served by FHA.’
The Federal Housing Finance Agency put that recommendation into action Monday when it released its new strategic plan and “scorecard” for Fannie and Freddie. Through the scorecard, the FHFA outlined the priorities for Fannie and Freddie for the next year. For the first time, the agency is requiring the two enterprises to come up with plans for how they will exit conservatorship.
In 2020, the FHFA will require Fannie and Freddie to assist regulators in determining what overlaps exist between the two enterprises and the FHA.
“Thoughtfully addressing these overlaps makes sense for both the Enterprises and FHA because they were created to perform different roles in our housing finance system,” FHFA Director Mark Calabria said. “In order to prepare to responsibly exit conservatorship, Fannie and Freddie must not repeat the mistakes of the crisis by stretching to serve borrowers who are better served by FHA.”
But Calabria argued that having Fannie and Freddie move away from this market wouldn’t result in prospective borrowers having fewer options for home financing. “The intention is that there are no gaps,” he told reporters during a separate briefing. “The intention is to take a holistic view point, rather than have an approach where Fannie, Freddie and FHA are all fighting for market share.”
Historically, Fannie and Freddie have competed for market share with the FHA, and in recent years the two enterprises have offered more mortgages with low down payments and to borrowers with high debt-to-income ratios, similar to the types of loans the FHA was designed to offer to lower- and moderate-income Americans.
Those loans are riskier for lenders however, because the borrower has less equity in the property and more debt to grapple with, which can cause problems in an economic downturn.
The dollar amount in loans that Fannie Mae and Freddie Mac own or guarantee is roughly 500 times larger than the amount they have in capital reserves.
Fannie and Freddie tend to serve borrowers with better credit scores, even when offering products similar to the FHA’s. That’s left the FHA, which is fully taxpayer-backed, with a riskier pool of loans.
“That decreases the credit quality of FHA and forces FHA in the long run to raise premiums,” Calabria said. “If you do that long enough, you don’t have anybody left except the worst credit risks.”
Separately, Calabria once again raised the alarm regarding the risk that Fannie and Freddie could fail again. Currently, the dollar amount in loans that the two enterprises own or guarantee is roughly 500 times larger than the amount they have in capital reserves.
As a result, timing is posing the greatest challenge to the FHFA’s efforts to get Fannie and Freddie out of conservatorship, Calabria said. If either of the housing or equity markets softens in the near future, that would make it much harder for Fannie and Freddie to raise capital.
“We’re not forecasting a downturn, but if we do have a downturn in the next couple years, they will fail,” Calabria said. “They will become insolvent, and they will run out of capital.”