Fannie Mae and Freddie Mac have provoked new criticism from Republicans for experimenting with new lines of business, expanding operations while nearing a tenth year in government hands.
Fannie and Freddie, which have been wards of the government since failing in the subprime crisis, are supposed to support a national secondary mortgage market by buying home loans from banks and other lenders and packaging them into securities for sale to investors.
The system has worked well enough that Congress hasn’t felt the necessary pressure to reform the housing finance system and remove Fannie and Freddie from government conservatorship. Even if members of Congress aren’t happy with the two government-sponsored enterprises backing the majority of new home loans, the housing market has done well enough to prevent a consensus from forming to pass legislation.
But the two companies are further provoking Congress with new programs that some see as an illustration that they are pushing the boundaries of what they are supposed to do.
One prime example: Fannie Mae has tested a program that allows lenders to consider AirBnB income in underwriting refinance loans.
The underlying problem, from the perspective of some Republicans and mortgage bankers, is not necessarily that Fannie and Freddie are getting bigger. In fact, they guarantee about the same amount of mortgage-backed securities they did 10 years ago — $5 trillion.
Rather, the issue is that they are venturing into new areas that are supposed to be off-limits to them.
“I thought this was stepping beyond where they should be,” said Rep. French Hill, R-Ark., a former banker who raised the issue last month in a hearing with Treasury Secretary Steven Mnuchin.
Written into the two government-sponsored enterprises’ charters is that they are prohibited from directly lending money to borrowers. There is supposed to be a “bright line” between their business of buying mortgages from banks and other lenders — the secondary mortgage market that they have a mandate to support — and any business directly originating new loans.
One program in particular that critics think is over the line is a Freddie Mac pilot program in which Freddie buys loans whose borrowers have made low down payments, then pairs the loans with private mortgage insurance arranged by Arch Capital, an outside private insurer.
Typically, private mortgage insurance is arranged by home lenders when they make the loan. Mortgage insurers have cried foul, saying that Freddie is effectively getting into the mortgage market and cutting them out of the deal.
That pilot is just one of a list of infractions pointed out by Mike Fratantoni, chief economist for the Mortgage Bankers Association. “This just looks like enterprises that are expanding their footprint in the market,” he said.
Members of Congress have heard those complaints, and brought them before Mel Watt, the director of the Federal Housing Finance Agency that oversees Fannie and Freddie.
Sen. Bob Corker, R-Tenn., challenged Watt during his most recent testimony before the Banking Committee about some of the pilot programs in question. Corker has tried and failed over the years to advance legislation to overhaul the housing finance system and shutter or reform Fannie and Freddie. In questioning Watt, Corker suggested that the pilot programs represented a step in the opposite direction. “I think where we were headed at one point was towards trying to reduce the footprint and the reliance,” he said. “And instead, over the last couple of years it’s expanded.”
Corker suggested that the government-sponsored enterprises’ ventures into new lines of business were part and parcel with their efforts to lower down-payments for borrowers and otherwise expand, rather than contract. In recent years, Fannie and Freddie have backed loans with down payments as small as 3 percent.
In fact, Watt’s predecessor, Ed DeMarco, had sought to shrink Fannie and Freddie’s footprint in the housing market. Watt, an Obama appointee, has steered the government-sponsored enterprises in the other direction, and justified it to Corker as necessary to fulfill their affordable housing missions.
“Everything … that you described was designed to make housing more affordable to people who cannot, now, afford to have either affordable homeownership or affordable rental,” he explained.
The FHFA did not provide a comment for this article after repeated requests. And neither the agency nor Fannie or Freddie were able to provide any sort of list of pilot programs underway.
Critics view the companies’ forays into new lines of business as an inevitable consequence of Congress leaving them unreformed for so long.
“The GSEs cannot help but grow,” noted R. Christopher Whalen, an investment banker and chairman of Whalen Global Advisors.
If Congress did ever get around to reforming the housing finance system, limits on their primary market activities would likely be part of the package.
Yet there are few signs that future congresses will have any more success than the ones of the past decade that have struggled and failed to change the status quo.
Nor would a narrower bill tailored to curbing the programs necessarily have support. But Congress has shown that it can act quickly on Fannie and Freddie when there’s consensus — in 2015, lawmakers rushed a measure to President Obama’s desk capping the companies’ salaries at $600,000 after Watt approved letting their compensation rise to $4 million.
Hill worried that such a narrow legislative effort could distract from work on a broader housing finance overhaul. “We’ve got to stay focused on that,” he said.
Instead, the more realistic possibility is that the Trump administration tries to put curbs on the activities and Fannie and Freddie.
When asked last month in the House of Representatives about the various pilot programs, Secretary Mnuchin said that “they should stay to their core business.”
President Trump will have the opportunity to nominate a replacement for Watt early next year. His appointee would have broad discretion to reverse whatever expansions Fannie and Freddie have undergone.
In the eyes of conservative Republicans, though, the worst-case scenario is that reform doesn’t materialize, and Fannie and Freddie eventually are reprivatized and again allowed to expand, taking on new risks with the knowledge that the government will bail them out if things go wrong.
Longtime critic Sen. Richard Shelby, R-Ala., raised that fear. “I’d hope that business is not going on as usual, that brought them down,” he said.
