Fannie Mae and Freddie Mac are known as Government-Sponsored Enterprises (GSEs) because of considerable benefits, such as tax exemptions, that they receive from the Federal government. The GSEs serve a critical function as they buy loans from banks, enabling banks to make more loans.
With GSE reform as a major priority for Congress, NCRC will continue to recommend legislation that establishes a strong regulator to provide oversight of the GSEs, while not hampering the GSEs from engaging in their mission to expand homeownership to underserved communities.
NCRC supports the following:
- Create a government guarantee that would be explicit and would be limited to direct purchases of mortgage loans instead of extended to corporate debt so that the GSEs would not have an incentive to massively increase their portfolios and over-leverage themselves
- Uniform regulation applied to all actors in the marketplace, not just regulation applied to GSEs and/or depository institutions with independent mortgage companies and Wall Street investment firms escaping rigorous regulation. This type of uneven regulation created incentives for financial institutions to compete against each other by lowering underwriting standards.
- Lawmakers must insure that a capable oversight body, perhaps the current Federal Housing Finance Agency (FHFA) with stronger enforcement authority, is in place to guard against future exorbitant risk taking and to require adequate capital reserves.
- The FHFA must prohibit the hybrid institutions from purchasing high-risk loans directly from lending institutions or via securitizations. The FHFA must determine the types of loans that have risky underwriting criteria and disallow the hybrid institutions from purchasing these loans. The FHFA must adopt the strongest standards from the Dodd-Frank bill and the Federal Reserve’s Regulation Z.
- Commendably, the FHFA has recently aligned the income limits in the GSE Affordable housing goals with CRA. In addition, the FHFA should extend the same prohibitions against the GSEs purchasing high-risk loans to the affordable housing goals or stipulate that loans counting for the affordable housing goals be the least risky of the loan purchases by the FHFA. In other words, loans that count for the affordable housing goals are prime rate, fixed rate loans. In this manner, the affordable housing goals can be above reproach since they would require that the safest and soundest loans financed by the GSEs are being extended to traditionally underserved populations.
- Lawmakers should limit the total market share that each hybrid institution can capture. The market share limit can be specified in statute or regulation. Alternatively, the existing GSEs can be broken up into three or more institutions. A greater number of smaller institutions will limit systemic risk since no one institution can expose the financial system to as much danger as large institutions did during this current crisis.
The Federal Home Loan Bank (FHLB) System is another GSE that provides much needed capital to banks and other lending institutions to make loans. A portion of the FHLB “advances” to lenders finances the Affordable Housing Program (AHP) and the Community Investment Program (CIP). AHP and CIP are important sources of financing for low- and moderate-income housing and economic development in disadvantaged neighborhoods. NCRC monitors developments in the Federal Home Loan Bank System to ensure that AHP and CIP are strengthened and that nonprofit community organizations have sufficient input in the decision-making processes of the Federal Home Loan Banks.
The budgets for the following programs will be monitored to ensure that they continue to thrive and serve the needs of underserved and vulnerable populations:
- Earned Income Tax Credit (EITC) is a refundable tax credit program for low-income working families. Since its inception in 1975, the program has been credited with lifting nearly 5 million families out of poverty every year.
- Individual Development Accounts (IDAs) are successful tools that encourage low-income families to save, build assets, and enter the financial mainstream by offering them matches for their own deposits. IDAs reward the monthly savings of working-poor families who are trying to buy a home.