Housing Finance Reform

Wednesday, May 01 2013

Updated April 2013

It has been well over 4 years since the federal government took control of Fannie Mae and Freddie Mac from their stockholders in a process known as conservatorship. Since this time the future of the government-sponsored enterprises and the secondary mortgage market has become a topic of debate among lawmakers and the Administration.

The development and reform of federal policy on housing finance is highly significant for credit unions and will be a focus of lawmakers in the 113^th Congress, which convened in January 2013. Incoming Financial Services Chairman Jeb Hersarling (R-TX) is a lead advocate of overhauling the mortgage giants and this issue is expected to be a key part of the committee's agenda moving forward. The committee is also focused on mortgage lending through the Federal Housing Administration.

In past years, the House has moved more quickly than the Senate in working on legislation that would alter the future of the housing finance system. While House Republicans put forward a series of bills aimed at removing the government from aspects of the mortgage finance process during the 112^th Congress, nothing of significance became public law. NAFCU continues to urge Congress to pass comprehensive legislation that takes into account the principles that are critical to ensuring credit unions have unconditional and uninterrupted access to the secondary market. NAFCU will continue to work with Congress and the Department of Treasury on this crucial issue.

The GSEs, specifically Fannie Mae and Freddie Mac, enable credit unions to obtain the necessary liquidity to create new mortgages for their member-owners by utilizing the secondary market. In addition, the Federal Home Loan Banks (FHLBs) allow credit unions to meet their liquidity needs through timely loans. The availability of these stable and reliable sources of funding has facilitated credit unions' ability to offer new mortgage loans and related credit to their members, many of whom have been denied access to homeownership by other lenders. Thus, both GSEs and FHLBs serve as valuable partners in credit unions' efforts to meet their members' needs, particularly with regard to mortgage loans. This continues to be true in the current economic environment.

After turmoil in the housing, mortgage, and financial markets raised doubts about the future of Fannie and Freddie, both entities were placed under conservatorship in September 2008. Lawmakers also created the Federal Housing Finance Agency to replace the Office of Federal Housing Enterprise Oversight as the safety and soundness regulator for the GSEs. The goal of conservatorship is to preserve GSE assets and return to sound financial conditions, allowing the conservatorship to end.

Recently, the FHFA has come under political pressure to shift its policy on principal forgiveness for certain underwater borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac. NAFCU has expressed concerns about this policy to the extent that it could enable or precipitate strategic defaults. Credit unions stand on the forefront of the battle to keep families in their homes and NAFCU has deep concerns about any government program that would encourage some borrowers that have the ability to repay to instead walk away from their home and cause credit unions and their members losses that cannot be recouped.

Unprecedented government intervention in recent years has brought the survival of Fannie and Freddie into question. With regard to substantive policy questions, NAFCU endorses the availability of a government backstop for mortgage-backed securities. While details on such a guarantee must be worked through over discussion and debate, we believe the GSEs, or the entity or entities that would replace them, must be able to purchase and hold mortgage-backed securities. The presence of at least one entity that has an explicit government guarantee and conducts itself without a profit motive is critical to smaller institutions due to the real possibility that the private market can systematically, or through market forces, exclude small entities from the secondary market.

As discussions about housing finance reform continue in the 113^th Congress, NAFCU is committed to educating Congress and the Administration about the positive impact the secondary market has had on the credit union community and the role credit unions play in ensuring the safety and soundness of our nation's housing market.

Housing Finance Reform Policy Letters

1-25-2013 The Role of the Federal Housing Administration in Housing Finance

12-11-12 Corker Vitter Strategic Default Letter

3-14-12 Menendez-DeMint Housing Reform Process Comment Letter

2-8-12 Johnson-Shelby State of the Housing Market

10-20-11 Housing Finance Reform Hearing: "The Continuation of the 30-Year Fixed-Rate Mortgage" Testimony

7-11-11 Garrett-Waters Fannie and Freddie Legislation Mark-Up Comment Letter

6-27-2011 Johnson-Shelby Housing Finance Reform for Small Financial Institutions Comment Letter

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Housing Finance Reform

Updated April 2013

Housing Finance Reform Policy Letters