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GSE Restrictions Raise Questions about Transparency and Public Debate

William Gambrione
Loan Options Guide

Last week, the Community Home Lenders Association (CHLA) wrote a letter to Treasury and FHFA asking for a suspension of Fannie Mae and Freddie Mac mortgage purchase restrictions adopted in mid-January as part of changes to the GSEs’ Preferred Stock Purchase Agreements (PSP).

These restrictions would: (1) cap at 6% the number of so-called “higher risk” loans Fannie and Freddie can buy, (2) cap at 7% the GSEs’ purchases of investor and second home loans, and (3) set an annual $1.5 billion limit on loans a lender can sell to Fannie or Freddie through the cash window.

We are already seeing market dislocations, pricing increases, and credit overlays in the early response to these changes.  Therefore, CHLA is calling for a suspension of the restrictions, so that Treasury and FHFA can conduct a review of the impact these restrictions will have on access to mortgage credit.

CHLA’s letter noted that limits on “higher risk” loans will have a disproportionate impact on minorities, low- and moderate-income, and other underserved borrowers – at a time when COVID has had a disproportionate financial impact on these very same individuals.   The cash window cap primarily affects smaller lenders, many of whom have not even been approved by Fannie or Freddie to securitize loans.

The 7% cap on combined investor and second homes actually is a significant reduction from purchase levels of just a few years ago.  These loans comprised between 10-13% of Fannie’s purchases each year from 2013-18, falling below 10% in 2019-20 only because of the owner-occupied refinance boom.[i] Compounding the problem is that the actual GSE levels will likely be well below 7%, because this cap is now being implemented on a lender-by-lender basis

Including any investor loans in a volume cap will reduce a critical source of financing for affordable rental units.  It is not clear why investor loans are even a concern, since FHFA and Treasury have not provided a risk analysis demonstrating the need for the reduction.

 The CHLA letter concluded by asking for these new restrictions to be modified or eliminated.  The new restrictions are disruptive and disproportionate, particularly in light of the GSEs’ recent record of profitability.  If loan risk is a concern, other more proportionate and less disruptive tools are available.

Equally important, the process and timing of the PSPA changes raise profound questions for the future of GSE reform and the continued progress of Fannie and Freddie on their path to exist conservatorship.  The PSPA changes adopted in mid-January were made with no real public input or transparency.  Codifying supervisory actions to control risk in a permanent legal document governing Treasury’s financial backstop of Fannie and Freddie also seems inappropriate.

With Congress failing to act on comprehensive GSE reform in the 12 years since the GSEs were placed in conservatorship, it is understandable that FHFA has used its authority under the 2008 HERA legislation to make progress on GSE reform.   FHFA is to be commended for using the PSPA to suspend the pernicious GSE profit sweep and to create a permanent policy of equitable access for smaller mortgage lenders.  Suspending the profit sweep had already been subject to significant public debate, and small lender equitable access had for many years been an FHFA policy enjoying broad support.

But if administrative actions are going to be the path to complete GSE reforms and facilitate a Fannie Mae/Freddie Mac exit from conservatorship, there needs to be more public debate, more input from affected stakeholders, and more transparency regarding important policy decisions and changes.

FHFA has generally done a good job of inviting public comment on its supervision of Fannie and Freddie, and its annual Scorecard has provided transparency to its regulatory objectives and measurement of the GSEs’ performance.  Treasury and FHFA should adopt the same transparent, inclusive processes with regard to ANY future changes to the PSPA or other major regulatory policies.

The loan restrictions also raise critical unanswered questions about the role FHFA can and should play as Fannie and Freddie progress towards and ultimately exit conservatorship, nominally becoming private entities again (albeit subject to FHFA supervision).

FHFA has a duty and regulatory authority to ensure that the GSEs operate in a safe and sound manner.  But should FHFA have authority to permanently impose volume restrictions on certain types of loans, per the January PSPA amendments, without prior public notice and comment?  Does this open the door to codifying further limits in the PSPAs, such as specific underwriting standards, again without public notice or debate?  What are the mechanisms to ensure we balance the GSEs’ responsibility to serve underserved markets with the risks that go along with it?  These are important questions that need to be debated and resolved, long before the GSEs exit conservatorship.

It is precisely these types of questions that led CHLA six years ago to call for an administrative resolution of the GSE reform process, with the GSEs operating under a Utility Model, in which Fannie and Freddie focus on their core mission of creating a secondary market for a wide range of lenders.

Regulating the GSEs under a utility model appropriately balances the need to produce adequate returns for investors with appropriate limits on risky behavior (such limiting the interest rate risk of portfolio holdings).   A utility model ensures that the GSEs serve low and moderate income and underserved borrowers and provides equitable access to smaller lenders and the borrowers they serve.

It is time for Congress, for other federal policy makers and stakeholders to conduct this public debate in earnest so that we reach an end state on GSE reform that works for everyone.

[1] As reported in its Form 10-K Annual Reports, investor/second home loans comprised the following percentages of Fannie Mae’s single-family mortgage purchases from 2013-18:  13% in 2013, 13% in 2014, 12% in 2015, 10% in 2016, 11% in 2017, and 11% in 2018. These purchases fell to 8% during both 2019 and 2020, reflecting higher Fannie purchases of refinances of owner-occupied primary residences.

About the Author

William Gambrione

President and CEO


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