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Taylor: Four Ways to Fix Fannie and Freddie

CNBC.com

As the Obama administration hosts a conference of a select group of housing experts on Tuesday to address the role that Fannie Mae and Freddie Mac will play in the housing market, we should remember that homeownership’s promise was ruined by Wall Street’s recklessness, not by federal policy.

On Monday, I told CNBC that homeownership is still a good investment for some and can be again for most Americans, if the housing market has adequate oversight.

That’s because before Wall Street ravaged our economy by aggressively marketing bad loans and stuffing them into ”innovative” products that they sold to investors and then bet against, homeownership was a good way for the middle class to build wealth and for lower-income families to move into the middle class.

"Lost in the conversation about what to do about Fannie and Freddie is the fact that they were highly profitable and successful enterprises for most of their history."

Today homeownership's pathway to greater prosperity is in jeopardy because some in Congress believe that federal homeownership policies, not Wall Street profits, forced the private sector to make six-figure mortgage loans to anyone who could breathe.

Before we undo what’s worked in the past, let’s not forget several important facts:


  • In September 2008, Henry Paulson’s Treasury Department took over Fannie and Freddiebecause Treasury knew the private market would collapse soon and that the government would need to step in and rescue the nation’s private mortgage finance system.
  • It is that rescue that drives the current Fannie and Freddie’s losses, as well as risky loans made by the GSEs (government-sponsored enterprises) after 2005 that had nothing to do with their affordable housing goals.
  • Fannie and Freddie made a bad situation worse, but greedy lenders, greedy investment banks, greedy (and incompetent) rating agencies and greedy (and shortsighted) insurance companies caused the subprime crisis. Federal regulators allowed it to happen.
  • The lack of regulation under the Bush administration resulted in Fannie and Freddie doubling their risky loan purchases from 25 percent in 2002 to 51 percent in 2006, according to data from the Financial Crisis Inquiry Commission.
  • The GSEs’ interest-only loans jumped from 2 percent pre-2004 to 15 percent in 2007.
  • Loans with a less than 10 percent down payment soared from 7 percent to 19 percent in the same time frame.
  • Exploding ARM (adjustable rate mortgage) loans increased from 8 percent in 2004 to 17 percent in 2005.
  • Fannie and Freddie’s desire to enjoy profit margins as great as Wall Street’s drove this increase, not its affordable housing goals. Fifty-five percent of loans made under the affordable-housing goals had down payments of 20 percent or more according to a HUD (Department of Housing and Urban Development) study.

Lost in the conversation about what to do about Fannie and Freddie is the fact that they were highly profitable and successful enterprises for most of their history. Shareholder value and profitability were the norm for most of the GSEs' history.

The Housing Fix -- A CNBC Special Report >> See Complete Coverage
The Housing Fix -- A CNBC Special Report >> See Complete Coverage

Had they not followed Wall Street and the private banking sector into the subprime abyss, they would, in my humble opinion, not be currently under the management of the federal government.

Let’s fix what’s broken and leave alone what works. To fix the nations’ affordable housing policy, we support bringing the GSEs to their former public-private status, but with some key changes.

First: ensure that a capable oversight body, with enforcement authority, is in place to guard against future exorbitant risk-taking and to require adequate capital reserves.

Second: prohibit the GSEs from entering high-risk securitizations; their oversight agency can determine the types of loans that have questionable and too risky underwriting criteria.

Third: make sure that their affordable-housing goals really benefit those who, but for the efforts of the GSEs, would be left out of the housing market. Finally, limit the total market share that each GSE can capture. These recommendations are outlined in full in the National Community Reinvestment Coalition’s commentletter to the Obama administration.

We also recommend that Congress expand and strengthen the Community Reinvestment Act, which requires that lending to expand access to capital and credit be done in a safe and sound way. A coalition of over 260 organizations has urged Congress to act this fall to do so.

As the Obama administration weighs its options, I hope it doesn’t throw out the baby with the bath water. Fannie Mae and Freddie Mac, reconstituted and reformed, can play a critical role in the housing market, but they should never be allowed to join Wall Street in whatever financial shenanigans it has in store for us in the future.

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John E Taylor is president and CEO of the National Community Reinvestment Coalition. He can be reached at johntaylor@ncrc.org