WASHINGTON - With the media shining a harsh spotlight these days on Freddie Mac and Fannie Mae, it came as no surprise that the Mortgage Bankers Association (MBA) held a session devoted exclusively to the beleaguered GSEs at the National Secondary Market Conference & Expo held last week.
Tackling issues of regulation, affordable housing and other matters dear to the orphaned GSEs, panelists Rep. Barney Frank (D-Mass) of the House Financial Services Committee and Wayne Abernathy, assistant secretary for financial institutions at the Department of Treasury, often diverged in their views. The recent sharp boost in lending targets by the Department of Housing and Urban Development (HUD) made the meeting particularly timely.
Congressman Frank said that instead of focusing on the likelihood of the GSEs' collapse, as the media and critics do, it is more important to use the pressure currently on these enterprises to make them work harder to generate affordable housing.
"Fannie Mae and Freddie Mac are not doing as much as they can given the advantages that they have," said Frank. "Let's make them do more." For instance, Fannie Mae, he said, moved in the wrong direction when it tried to cut back on its manufactured housing activities, which Frank sees as a good resource for lower-income borrowers. Democrats successively pressured the agency to drop those plans (see ASR 2/16). He added that he expects neither Fannie nor Freddie to make money on every product that they offer. If the GSEs do not supply cost subsidy, "then what do we need them for?" Frank asked.
He also noted that, unlike the Federal Home Loan Banks that give 10% of their income to an affordable housing grant program, there might be a problem expecting the GSEs to give a percentage of what they earn directly to affordable housing. As players in the secondary market, and unable to originate mortgages themselves, they are basically taking what's offered them, Frank explained. He wants Fannie and Freddie to increase their affordable housing activities instead, but not to push them into something beyond their control.
Recent attacks on the GSEs are on two fronts - their competitors and the Bush administration, as affordable housing is not currently part of government policy, according to Frank. He said that the current administration has artificially created an impasse between the issue of safety and soundness on the one hand and affordable housing on the other. There is also the intense focus of allowing a receivership provision into the GSE legislation currently pending in Congress. However, Frank said that the danger that the receivership provision is trying to prevent - a scenario where the GSEs become insolvent - does not even exist.
In contrast to Frank, the Treasury's Abernathy focused on the importance of giving the GSE regulator full authority to put the GSEs into receivership if they become insolvent. He disagreed with giving Congress the chance to review the appropriateness of this action, which is currently part of the pending GSE bill. He questioned how the GSEs would procure funding in the event of their insolvency if the entity's regulator did not have this control. This scenario would also challenge the security of mortgage-backeds held by these agencies, he said. Abernathy said that the market is operating under the illusion that the government is backing Fannie and Freddie obligations, which is not the case. Instead, the agencies are only granted financial benefits and subsidies such as tax exemption and the benefit of not limiting banks on how much Fannie and Freddie debt they can hold. The government intends for them to use these financial privileges to carry out their mission.
Abernathy also said that the current regulator has inadequate resources, in terms of stature and tools, to make sure that the GSEs focus on their housing goals. He calls for independent funding for the regulator. He also said that the GSEs should focus on channeling their resources to provide affordable housing to underserved segments of the population, such as minorities. Currently, the national rate for homeownership is about 70%. However, the rate of minority homeownership is around 50%.
On a related note, Paul Peterson, executive vice president and chief operating officer at Freddie Mac, told reporters at a press luncheon that Freddie is committed to both safety and soundness and their housing mission, as the agency struggles to properly define these conflicting goals.
He also commented on HUD's setting of higher affordable housing goals as part of the recently released regulation on the GSEs' lending activities. "I have people working right now analyzing the data," he stated. "It is a very complex proposed rule. We haven't formulated an answer yet."
"Most people don't realize how much we've done in 2004," he added. "It's like adding an increase on top of a massive increase. But we are not prepared to say that those goals are unrealistic."
However, Peterson said that Freddie Mac is absolutely committed to doing as much as it can, pointing out that the agency has in the past engaged in activities (such as educating minorities) that did not necessarily directly increase affordable housing but have made a substantive impact.
If the mortgage market were experiencing a period of credit deterioration similar to 1994, there would be a better understanding of the value of what Freddie brings to the market, said Peterson, referring to the credit guarantee that the GSE provides.
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