Earlier this month, NCST joined the Center for Responsible Lending and 12 other organizations to comment on the Federal Housing Finance Agency’s (FHFA’s) re-proposed rule on capital requirements for Fannie Mae and Freddie Mac. When finalized, FHFA’s capital framework will have significant impact on Fannie and Freddie’s overall role in the mortgage market, including their ability to compete with other financial institutions, to set standards for and lead the mortgage market, and to serve underserved consumers and markets.
Unfortunately, FHFA’s recent proposal requires gratuitously high capital levels for Fannie and Freddie that run directly contrary to their charter mission. This mission includes serving a countercyclical role in the mortgage market and promoting access to mortgage credit for underserved borrowers. FHFA’s re-proposed rule requires such excessive capital because it erroneously treats Fannie and Freddie as banks and therefore requires bank-like capital.
As a result, the proposed rule would unnecessarily increase costs and reduce mortgage credit availability, especially for low- to moderate-income families and families of color. It would do this directly, by pricing out many borrowers with lower credit scores and higher loan-to-value ratios. It would also do this indirectly, by pricing out less risky borrowers who generate much of the current cross subsidy that makes loans more affordable. The proposed rule would also reduce Fannie and Freddie’s incentives to distribute their credit risk, leading to more risk being held at these institutions despite their smaller market share. In the end, the proposal would make the mortgage market less inclusive and further aggravate our nation’s racial wealth gap.
As the joint comment letter makes clear, FHFA’s re-proposed rule is critically flawed. The comment letter makes specific recommendations that would improve the capital framework. It also calls on FHFA to regulate the GSEs as utilities, so that they better promote affordability and more equitably serve low- to moderate borrowers and families of color. To read the full comment letter, click here.