Congress is ready to wind down the GSEs and gut their duty to create a support for the financing of affordable housing.
Since their establishment, the GSEs have had a "duty to serve" these goals at a tacit quid-quo-pro for their implied guarantee by the taxpayer.
Affordable housing goals were never more than a small fraction of activity at the GSEs, so it seems very possible that low-cost housing could be jettisoned much more easily. A wing of the GOP right says it was the duty-to-serve standard that caused the GSEs to fail. It mirrors other politically-motivated arguments, such as the idea that the Community Reinvestment Act forced banks to make bad subprime and predatory loans to unqualified borrowers.
Imagine that there is no GSE (easy if you try):
- How it will the policy impact low and moderate income households and communities?
- How will it impact communities of color?
- Is there a consideration that financial institutions and lending policy reflect inclusion and fairness for all?
- How is the uneven power relationship between lender and borrower tempered by the law and its enforcement?
About the Duty to Serve
My bigger concern is that the Duty to Serve for lenders (CRA) and the secondary market (Fannie and Freddie) will be either lost in the public conversation or attacked rather than affirmed. This Duty to Serve is an important issue that is already being undermined by forces external to this question. The new QRM rules, outlined in Dodd-Frank and written into specifics by the FDIC yesterday, effectively create a two-tiered mortgage loan market: one for loans with twenty-percent down-payment, and another one for the rest. Economists think that the loans in the "other" market will suddenly be unprofitable without significant interest rate increases. One estimate said that banks would have to charge an additional 300 basis points, even if the lower down-payment borrowers paid for mortgage insurance.
The QRM only applies to issuers of securities and it exempts the GSEs from its rules. This means that Fannie and Freddie can sell the bundles of MBS that they own with less burden to bear than is going t be put on private investors. As long as the GSEs remain active, then the stiffer down-payment rules are far less impactful. Right now the GSEs hold about 80 percent of new mortgage debt.If the GSEs are wound down, though, then it will be much harder to find an appetite for non-QRM loans. That is why the idea of winding down the GSEs could have so many unforeseen consequences.
It is clear that low-wealth borrowers will be the ones that can product a twenty percent downpayment. That means fewer first-time homebuyers, and fewer buyers for owners of homes that want to move up to a larger home.
The sad thing about getting rid of the GSEs is that there is already a rule in place to make them safer. The Loan Level Price Adjustments, designed to increase the capital base of those GSEs, is already a reality.
We don't know where this will end. On one hand, the GSEs may drop their implicit support for affordable housing. Elsewhere, QRM may make it harder for all kinds of people to get a conventional mortgage loan at an affordable price.
by Peter Skillern
Mr. Skillern is Executive Director of the Community Reinvestment Association of North Carolina
Have something to say? Submit a short essay (approximately 300-600 words) for Bank Talk.