Last week I had the opportunity to participate in “Locked Out: What Losing Fannie, Freddie, and the Affordable Housing Goals Will Mean for the American Dream.” Responding to renewed interest in reforming America’s federal housing finance system, the forum, hosted by the National Community Reinvestment Coalition, delivered a spirited and informative conversation about the future of the Government Sponsored Enterprises (GSEs), aka Fannie Mae and Freddie Mac, and housing finance reform.
Photo credit: National Community Reinvestment Coalition
At the Center for NYC Neighborhoods, we work to ensure that New Yorkers have access to affordable, sustainable homeownership opportunities, and we believe that any reform to the housing finance system must further this goal. To that end, saving the 30-year mortgage by ensuring the continuation of government guarantees in the residential mortgage market is a major priority. Our policy brief, Moving Forward on Housing Finance Reform, further articulates the Center’s four goals for GSE reform: to ensure continued stability in the housing financial market; provide explicit government-backed guarantees for certain types of mortgages; ensure equal access to the 30-year, fixed-rate mortgage; and provide a stable source of funding for affordable housing initiatives.
Locked Out’s panelists, representing a range of organizations including the Center for American Progress, the NAACP, Moody’s Analytics, and Quicken Loans, engaged in a vigorous conversation about the role of our federal housing finance system and the future of affordable homeownership. While the panelists sometimes differed in their prescriptions for the future role of GSEs, all agreed that some level of reform is necessary.
Some takeaways from the event:
- The mortgage market has become too tight to accommodate many creditworthy American households: While acknowledging that mortgage lending standards were too loose in the build-up to the financial crisis, panelists expressed concern that the pendulum has swung too far in the opposite direction. Today, the average credit score for a mortgage guaranteed by Fannie Mae or Freddie Mac is 760, a very high score that is well above the median for New York State. Panelists agreed that homeownership opportunities should not be limited to families with near-perfect credit, but should be brought back within reach for more American families who are perfectly creditworthy.
- The time has come for Fannie and Freddie principal reduction: From our experience working with nearly 30,000 NYC homeowners, we consider principal reduction to be the “gold standard” when it comes to preventing foreclosures for underwater homeowners. Finance industry veteran and Locked Out panelist Jim Millstein concurred, arguing that principal reduction makes good business sense as well, considering that private mortgage servicers are increasingly offering principal reduction modifications for their own portfolios. Despite the growing consensus in favor of principal reduction, the Federal Housing Finance Agency currently does not allow principal reduction for any mortgage backed by Fannie and Freddie. We are hopeful that this policy will change under the leadership of new FHFA Director Mel Watts.
- Fund the National Housing Trust Fund: Panelists devoted much of their conversation to funding the National Housing Trust Fund as one means of promoting affordable housing. Likewise, we believe that a successful housing finance policy must provide for a stable source of funding for affordable housing initiatives. Although the 2008 Housing and Economic Recovery Act established the National Housing Trust Fund and required Fannie Mae and Freddie Mac to contribute a small portion (.042%) of new business to this fund, so far they have not begun to make contributions. Given that Fannie and Freddie are currently profitable, it is time for them to start contributing.
- Housing counseling should be part of the GSE reform conversation: While housing counseling was not extensively discussed during Locked Out, we believe that HUD-approved pre-purchase and post-purchase counseling can and should play an essential role in ensuring that first-time homebuyers are matched with mortgages that they can repay. For example, a recent study found that clients receiving pre-purchase counseling and education are one-third less likely to become delinquent in the first two years of their loan. Promising proposals advanced by groups such as the National Council of La Raza include the inclusion of housing counseling as a risk reduction tool in evaluations by the Office of Underwriting and the inclusion of housing counseling as an eligible activity in the Housing Trust Fund.
Thanks to the National Community Reinvestment Coalition for hosting such a thought-provoking event! We look forward to continuing to be part of the GSE reform conversation.