Housing Market Stability, Affordability and Government Guarantees
Six years ago, in September 2008, Fannie Mae and Freddie Mac were taken into conservatorship as the mortgage market collapsed.
Today, the two government-sponsored enterprises are profitable, but they currently have the highest guarantee fees on record, coupled with the lowest risk profile. Meanwhile, homeownership rates are at their lowest level since 1995, and racial, income and age-based gaps in homeownership are widening. This is bad news for the nation's housing system.
Our research shows that the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, can help improve both affordability and stability in the housing market by lowering the price of mortgage loans in accordance with their public mission while still accurately reflecting their long-term risk.
The UNC Center for Community Capital outlined how in two commentaries recently submitted to FHFA on issues critical to the unfinished business of broadening access to safe, affordable mortgage lending.
The commentaries responded to FHFA questions on:
In both commentaries, we stress that overly conservative approaches to guarantee pricing and mortgage insurance that place higher burdens on lower-income, minority, younger and first-time homebuyers, as well as any household in a housing downturn or distressed market, can unnecessarily prolong housing market stagnation.
Loan-level price adjustments and other guarantee fee pricing used by Fannie Mae and Freddie Mac. (Read the commentary)
Regulation of private mortgage insurance, which enables low-wealth borrowers to borrow from the Enterprises. (Read the commentary)
Researchers recommend transparency, risk pooling
Mortgage guarantees are insurance policies that compensate lenders or investors for losses from mortgage defaults. Private mortgage insurance is the preferred form of credit enhancement required by the charters of both Fannie and Freddie for home loans in which the loan-to-value ratio is greater than 80 percent. FHFA recently requested public input on regulations governing both.
Our responses to FHFA include an analysis of Fannie Mae's historic loan level data showing how safety and soundness can be achieved without excessive costs that limit access to credit and affordability.
Among our key points:
Two principles introduced in our commentaries shed light on many important questions raised by the FHFA in its requests for input. Two policy briefs explain these in more detail:
Greater transparency from FHFA and the enterprises about loan characteristics and financial losses would substantially improve public discussion of guarantee fee pricing.
Based on the information that is available, the current levels of guarantee fees are more than enough to cover the key components of the guarantee fee: expected losses, unexpected losses and return on capital, and administrative expenses.
Borrowers with low down payments are being overcharged unnecessarily because the loss mitigation benefits of private mortgage insurance are not being fully recognized.
Risk-based pricing, in either guarantee fees or private mortgage insurers' capital requirements, can create self-fulfilling prophecies and exacerbate market volatility.
Risk-pooling, or a "purpose-based" return on capital, flattens the pricing curve, creating greater stability and affordability in the housing market.
Research shows lower-income borrowers can be served safely
The UNC Center for Community Capital has extensively researched the risks and benefits of low down payment lending, particularly that facilitated by the Enterprises. Since 1999, the center has undertaken research on loans made to low- and moderate-income borrowers under the Community Advantage Program, a partnership between Self-Help, the Ford Foundation and Fannie Mae.
Our research confirms that low down payment lending can and has been undertaken safely and soundly when borrowers are offered access to sound and efficiently priced mortgage products. Our studies have examined how risk factors and lender practices determine sustainability for households and lenders alike. (See Community Advantage Panel Study: Sustainable Approaches to Affordable Homeownership for a summary of our decade of research, or read our book Regaining the Dream: How to Renew the Promise of Homeownership for America's Working Families.
Ensuring broad access to quality mortgages by creditworthy borrowers, including those with lower incomes and down payments, is critical to restoring a vibrant housing market and economy. Sensible pricing of guarantee fees and private mortgage insurance can play a key role in reaching many potential newcomers to the market, particularly those with lower incomes.
FHFA recently released a Request for Comment on its housing goals, which will determine how much of a share of their business Fannie and Freddie should devote to lower-income borrowers and neighborhoods. Their ability to reach these targeted populations will be directly linked to the guarantee and mortgage insurance fees they charge.
The UNC Center for Community Capital is the leading center for research and policy analysis on the transformative power of capital on households and communities in the United States. The center's in-depth analyses help policymakers, advocates and the private sector find sustainable ways to expand economic opportunity to more people, more effectively. For more information, visit www.ccc.unc.edu.