The Congressional Budget Office is a non-partisan agency within the U.S. Congress that provides objective budgetary and economic information. Their report puts a dollar amount on the estimated government subsidies that the FHLBank system receives as a Government-Sponsored Enterprise (GSE). The FHLBank system comprises 11 regional banks that extend cheap advances to their membership of banks, credit unions, and insurance companies with the intended purpose of supporting housing and community development. As a GSE, this system receives special benefits (including exemption from taxes) in exchange for providing public benefits such as helping meet unmet credit needs, facilitating financial products for underserved groups, and supporting community development.

“The new Congressional Budget Office report put a number – to the tune of $7.3 billion a year – to the public subsidies that FHLBanks receive,” Sharon Cornelissen explains, who is the chair of the Coalition of FHLBank Reform and the Director of Housing at the Consumer Federation of America. “The bulk of these billions in public funds subsidize corporate profits rather than Americans’ ability to afford a house. Consumers deserve much more from the FHLBanks, especially as we find ourselves in the middle of a national affordable housing crisis.”

Key highlights from the report include:

1. Multi-billion Dollar Subsidy. The CBO estimates that in fiscal year 2024, the FHLBank system will receive a total gross government subsidy of $7.3 billion.
2. These Subsidies Mostly Support Profits Rather Than Offer Public Benefits. The Congressionally-mandated 10% of FHLBank net income toward Affordable Housing Programs, which support affordable housing construction and downpayment assistance across the nation, is tiny compared to the profits realized by the Banks and their members. In 2023, FHLBanks paid $355 million to Affordable Housing Programs (AHP) but paid out $3.4 billion to members as dividends. Through these payouts, the FHLBanks are distributing a public subsidy as profit to banks and insurance companies.
3. CBO Questions “Trickle-Down Economics” Model of FHLBanks in Today’s Mortgage Markets. The CBO report also raises serious questions about the extent to which this public subsidy gets passed on to the public through other indirect benefits that FHLBanks provide, questioning whether consumers see lower mortgage rates as a result of FHLBank subsidies. Over 40% of members of FHLBanks have not originated a single mortgage over the last five years.

George Collins, an advisor for the Coalition for FHLBank Reform and former executive vice president and chief risk officer at the Federal Home Loan Bank of Boston, noted: “Our Coalition’s initial impetus was the skewed and unfair distribution of the FHLBank profits. This report affirms our concerns and further energizes our efforts.”

For more information or inquiries, contact:

Sharon Cornelissen at scornelissen@consumerfed.org

George Collins at ghcoll25@gmail.com

About the Coalition for Federal Home Loan Bank Reform:

The Coalition for Federal Home Loan Bank Reform is a non-partisan organization dedicated to bringing together a wide variety of stakeholders to discuss, educate and shape reforms aimed at enhancing the ability of the FHLB system to address the nation’s unmet housing and community development needs.

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The GSE Patch’s success in facilitating access to homeownership for many creditworthy borrowers is due to its ability to allow creditors to use a richer and more complex approach in assessing borrowers’ ability to repay than that otherwise afforded creditors seeking Qualified Mortgage status. If the patch expires with the current debt-to-income (DTI) ratio of 43% remaining in place, the groups anticipate that the change will negatively affect the consumers for whom access to credit is already hard to come by. Specifically, low-income borrowers, borrowers of color, and borrowers with student debt will all be negatively affected without other adjustments made to the Qualified Mortgage definition.

In their letter, the groups call for the CFPB to eliminate the 43% DTI ratio threshold and the associated Appendix Q for prime and near-prime loans as singular requirements for Qualified Mortgage status. The letter further requests that the Bureau take steps to ensure that ability-to-repay remains a key component of loans with Qualified Mortgage status.

The groups look forward to working with the CFPB to ensure that the complex set of statutory and regulatory requirements designed to protect consumers participating in America’s mortgage markets do not instead operate to unfairly bar consumers from those markets.

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But the report lands in an environment where there is no likely path to legislative action on Fannie Mae and Freddie Mac, and its organization and recommendations reflect this reality.  So after many conferences, meetings, hearings, white papers and recommendations from every point of the compass, it appears that Fannie Mae’s and Freddie Mac’s role in the mortgage market will end pretty much as it began – with a duopoly of congressionally chartered private shareholder owned companies dominating the secondary market.

The result for consumers will be a mixed bag.  On the one hand, there will continue to be support for long term fixed rate mortgages; underwriting standards for most mortgages will be broadly uniform and driven by Fannie and Freddie; global and national investors will confidently provide the cash to fuel US homeownership and rental housing finance; and this duopoly will be constrained in some measure by stricter regulation than in the past and with an enduring requirement to meet specific housing goals and investments in targeted markets through the duty to serve requirements adopted in 2008.  On the other hand, mortgages are likely to become more expensive for more borrowers; it will be harder for low wealth consumers with less than sterling credit to get a mortgage outside of FHA, VA or other totally government supported lending; and managing the inherent conflicts between public purpose and private shareholders will continue to be a challenge for FHFA and Congress.

Legislative Recommendations

The report contains both legislative and administrative proposals.  The legislative proposals fail to address the specific hurdles that have stymied even bipartisan legislative efforts in the last 10 years, which have included a lack of agreement about how to manage access and affordability for LMI borrowers in any new legislation.  They would eliminate the current regime of housing goals and specific duty to serve requirements with something like a plan advanced in draft Senate legislation last year that would scrape a fee off guaranteed securities and give the money to HUD for specific on-budget appropriated programs aimed at LMI borrowers.  This was a key reason for the failure of last year’s Corker Warner reboot, and there is no support for this approach among Democratic leaders in the House or Senate.  The report offers no further insight into how this recommendation would fare any better now, especially with a Democrat controlled House, or how to modify it to bring any Democratic support. Early highly negative responses from both House Financial Services Committee Chair Maxine Waters (D-CA) and Senate Banking Committee Ranking Member Sherrod Brown (D-OH) reinforce this.  The report also notes the challenge in a multi-guarantor system of ensuring that guarantors serve a national rather than smaller geographic areas but fails to offer any usefully specific ways to resolve this problem.

Administrative Proposals

Given the small chance of legislative action, the report’s meatier administrative recommendations move front and center.  These amount to a roadmap for recapitalizing Fannie and Freddie and then releasing them from conservatorship. Given the broad powers granted to FHFA in the HERA amendments of 2008 and in the terms of the conservatorship, there is little to stop FHFA from moving forward as outlined in this report.

Under this approach the current affordable housing approach – with the housing goals, duty to serve regime, and the 4.2 basis point assessment to fund the Housing Trust Fund and Capital Magnet Fund –would remain in place, although the report urges consideration of undefined “alternative approaches.” The proposal also would keep in place the Preferred Stock Purchase Agreements (PSPAs) through which Treasury invested nearly $200 billion to shore up the companies’ capital, maintaining their explicit guarantee.  But recapitalization would begin through an end to the so-called Net Worth Sweep, which in turn replaced the original quarterly dividend on the PSPAs.  The sweep would be replaced with a periodic commitment fee to pay for the PSPAs’ guarantee.

The report promotes administrative actions that would reduce the GSEs’ role in the market. This is promoted as a way to “crowd in” private capital that has remained largely on the sidelines since the crisis.  But doing so risks constraining mortgage access at a time when the larger economy is already sending weakening signals.  The report therefore basically punts on whether and when to take such actions as restricting GSE financing of vacation homes, investor properties, cash-out refinances, among other products, directing FHFA to closely examine such moves.

The report also endorses a continuing role for the GSEs and any successors in financing multifamily rental housing but expresses concern that they have too big a footprint in the market today, again suggesting limitations that could be pursued by FHFA as administrative actions.

The report also highlights the overlaps that currently exist between the GSEs’ market and that of other federally supported guarantors like the FHA and urges both legislative and administrative action to reduce the overlap between the markets they serve. Examples of such overlap cited in the Treasury report include high LTV Fannie and Freddie loans, FHA loans for cash out refinancings, and loans refinanced from conventional to FHA mortgages.   A companion report from HUD also highlights the need for better coordination and market share management, and recommends legislative action to establish “…FHA, VA and USDA…as the sole source of low downpayment finance for borrowers not served by the conventional mortgage market.” But it’s not clear what other sources this action would restrict.

HUD Report

The HUD report also outlines a legislative and administrative track for reform.  The key legislative recommendation would set up FHA as an autonomous corporation rather than the government agency it now is.  Again, Congress is unlikely to move on this recommendation although similar recommendations have been made by several commentators across the political spectrum, dating back at least to a housing commission report in 2002.

The report also recommends administrative steps for HUD to establish a “Housing Sustainability Scorecard” to monitor its insurance programs; further restrict down payment assistance from private sources, citing poorer performance among loans with such a feature; refine and finalize a “defect taxonomy” to give lenders better guidance on the relative penalties likely to result from mistakes in FHA insurance placement; make the FHA loss mitigation process less cumbersome; clarify loan conveyance procedures to reduce delays and confusion; and work with the CFPB to reduce loss mitigation costs.

Next Steps

The Senate Banking Committee has scheduled a hearing with Treasury Secretary Mnuchin, FHFA Director Calabria and HUD Secretary Ben Carson on September 10 to review the report.  The hearing most likely will reinforce the lack of sufficient Senate consensus on key issues like assuring broad access and affordability.  How quickly and how aggressively FHFA and Treasury move on the administrative recommendations in the report may depend in part on the tenor and questions raised at the hearing.  But the most likely outcome is a renewed effort by Director Calabria to move forward on the administrative recommendations as quickly as possible.

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But it now confronts policy makers with a critical choice. Do they let Fannie and Freddie keep this upgrade of what will now become the nation’s primary securitization infrastructure? Or do they take the next logical step and put this critical infrastructure into the public’s hands? My co-authors and I in 2016 proposed A More Promising Road to Mortgage Finance Reform, in which precisely such a market utility , owned by a new government owned corporation, would take over all of the issuance functions for government supported lending, while relying on a broad array of private credit insurers to protect the government from mortgage loss risk in all but the most exigent economic circumstances. The successful launch of the UMBS makes the case for this path more compelling than ever.

The bonds were issued by the Common Securitization Platform (CSP) that the two companies developed through a joint venture supervised by the Federal Housing Finance Administration (FHFA). The change from bonds issued separately by the two companies was largely invisible to the general public, and probably to most congressional members who ultimately are responsible for the charters that govern the two companies.  By all reports, it happened without incident – bonds were created, investors bought them, and worldwide investment in the US housing market continued without any hiccups.  But not everyone is thrilled with the notion that this new platform and security will further strengthen the companies’ hold over the mortgage market.  The companies’ ownership of the platform has already sparked demands by some mortgage industry players to open the system for others to use, and to force Fannie and Freddie to share currently proprietary data about their current MBS inventory so others can compete more effectively with them through the platform.

The successful launch of the UMBS presents the perfect opportunity to adopt our plan and move the platform into public ownership.  Leaving the platform with Fannie and Freddie would cement their too big to fail status and place its ongoing support for mortgage finance in the hands of shareholder owned companies with powerful profit maximizing incentives – companies that have shown that they can fail and indeed are too big to be allowed to fail in their fully private forms.  Taking the public ownership approach would remove this critical instrument of national economic security from private ownership and exploitation and insulate it from the risks of a repeat failure of the companies.  If the platform is owned by a public corporation, it would continue to function even if one or more entities providing the credit insurance behind the bonds’ assets failed.  Rather than betting the whole mortgage finance system on the solvency of a couple of private companies, our plan would protect the system’s critical “plumbing” while leaving genuinely private entities to shoulder the mortgage risks.

A single security and a single issuing platform have been a feature of every serious proposal for a post-conservatorship mortgage finance system.  Until now, it has been only theoretically possible.  Now it is a reality.  There will never be a better time to take the next logical step to make this resource fully protected and available for securities backed by any qualified credit insurer by putting it in a publicly owned corporation.

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The comments were filed in response to a Notice of Proposed Rulemaking sparked by legislation adopted in the last Congress directing FHFA to establish standards and criteria for the validation and approval of credit scoring models.  Credit scores are derived from consumer information collected by Credit Reporting Agencies (CRAs) from creditor reporting on consumers’ debt and credit line repayments.

FHFA is the conservator and regulator of Fannie Mae and Freddie Mac (the ‘GSEs’), the dominant funders of mortgage credit in today’s market.  The two companies only permit the use of one credit score – provided by Fair Isaacs as the familiar “FICO” score – by lenders seeking to sell or securitize mortgage loans through the companies.  Moreover, the only score authorized by the companies at this time is so-called “Classic FICO,” which has not been updated in many years.  However, neither Fannie nor Freddie has been willing to adopt newer models from FICO or other competitors such as Vantage Score LLC, leading to the congressional direction.

“Having a process in place for Fannie and Freddie to regularly assess new and emerging models to ensure as many consumers as possible are judged as fairly and comprehensively as possible is a critical part of assuring broad and fair access to responsible mortgage credit,” noted Barry Zigas, CFA Director of Housing Policy.  “FHFA’s draft rule is a good step in this direction but needs further improvement.”

The comment letter urged FHFA to find ways to shorten proposed time lines for assessing new scores, noting rapid cycle times in emerging technologies and the GSEs’ own underwriting engines.

The letter also opposed FHFA’s proposed restriction on the adoption of any scores from companies in which credit reporting agencies have a financial or ownership stake.  At present this prohibition would apply only to Vantage Score, which is owned by the three major credit reporting agencies, Transunion, Equifax and Experian.  The letter noted that the concerns about anti-trust and anti-competitive pricing cited in the proposed rule have been addressed in litigation and resolved in favor of Vantage Score, and that scores from both FICO and Vantage Score are in wide use by other creditors in auto and consumer lending without any evidence of the anti-competitive concerns cited in the proposed rule.

“We support FHFA direction to the GSEs not only to incorporate the latest tested and verified credit scoring models available, but also to open up their process to other scores than FICO and over time other models that may emerge,” the letter stated. “This would bring the mortgage marketplace in line with other credit markets and, we believe, help assure the broadest possible access to GSE mortgage credit.”

The post Fannie, Freddie Should Use Updated Credit Scoring, CFA and other Consumer and Civil Rights Groups Urge FHFA appeared first on Consumer Federation of America.

The post CFA Supports the Rapid Adoption of Alternative Credit Scoring Approaches for Mortgage Lending appeared first on Consumer Federation of America.

This plan follows the general outlines of successive proposals that have been presented since 2008, including the Bipartisan Policy Center’s Housing Commission recommendations, the 2014 Corker-Warner and Johnson-Crapo legislative drafts, the more recent 2018 Corker-Warner efforts and even the Obama Administration in one of its options in its 2011 housing finance reform paper.

Fannie and Freddie would lose their congressional charters.  The US Government would issue guarantees on securities issued by fully privatized Fannie and Freddie, as well as other guarantors approved by a federal regulator.  Taxpayers and government insurance “…would be protected by virtue of the capital requirements imposed on the guarantors, maintenance of responsible loan underwriting standards, and other protections deemed appropriate…” by their regulator.

The plan would not require these new private guarantors to shoulder any responsibilities for assuring mortgage access for low and moderate income borrowers and communities.  Instead, the plan would shift that responsibility entirely to FHA, Rural Housing Services (RHS) and the Veterans’ Administration (VA).  As stated in the proposal, “the newly fully-privatized GSEs would have mandates focused on defining the appropriate lending markets served in order to level the playing field with the private sector and avoid unnecessary cross-subsidization.  A separate fee on the outstanding volume of the MBS issued by guarantors would be used specifically for affordable housing purposes, and would be transferred through congressional appropriations to, and administered by, HUD.” (emphasis added).

There is a long-standing expectation that private entities that enjoy the federal government’s support for their businesses have a reciprocal duty to ensure those benefits are shared as widely and equitably as possible.  Thus Fannie and Freddie have housing goals to gauge their success at serving LMI borrowers and communities, a fee to support affordable housing and community development, and a duty to serve specific underserved markets.  Regulated, insured primary market lenders have Community Reinvestment Act (CRA) obligations to ensure they serve the full needs of the communities they are chartered to serve.

This draft appears to break that tradition.

I have advocated for a more inclusive approach to the federal government’s support for homeownership and mortgage finance before (ZIP file).  FHA and its sister federal mortgage actors need to be seen as part of the broad federal solution set, operating together with private capital to assure the broadest possible service. But private entities enjoying the government’s support must be held to an expectation they will serve the market as fully as possible, not just to maximize their returns and shift the entire burden of serving low wealth borrowers with less than perfect credit to federal insurance programs.

There is little chance the Administration’s proposal will lead to any legislative action this year.  But its decision to wade into the mortgage reform pool at last is significant, even if buried in their reorganization plan and released with little fanfare.  Its apparent decision to divorce issues of access and affordability from the new guarantors it hopes will compete with newly privatized Fannie and Freddie is disappointing.

This blog originally appeared here.

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Even with the draft’s proposed subsidy, the draft will leave a significant portion of the market to FHA. Borrowers with very little cash to put down and moderate credit scores will still find FHA their most economical choice. The subsidy will pull some share of borrowers into the private system, but it will not do so for them all. Even with its problems, FHA will remain a major part of the federal system of support for home ownership finance. The draft’s failure to incorporate it more intentionally into its proposed new structure is a missed opportunity.

There are other concerns with the draft, including the lack of enforceable standards of service to under served communities and borrowers for the new guarantors. Subsequent versions may change its outlines significantly. But Congress faces what will hopefully be a once in a generation opportunity to redefine federal support for mortgage finance. Its goal should be a durable, comprehensive system. Trying to solve broad challenges of access in the market by isolating a new privately funded system from the government’s other supports will only perpetuate the uncoordinated and unsatisfactory system we have today. We can and should do better than that.

Private Guarantors and Risk Based Pricing

The draft would rely on newly chartered private guarantors operating with market-priced capital. It also would require these guarantors to off load much of the credit risk to others, like MIs. In turn, this would drive risk-based fees for their credit insurance and that of their risk sharing partners. Borrowers with higher risk profiles – typically those with lower down payments and lower credit scores – would be charged progressively higher fees. The bill would use the 10-basis point fee to offset these risk-based costs for certain borrowers. The draft defines these as borrowers with incomes below 80 percent AMI (or first-time homebuyers below 100 percent AMI). A recent Urban Institute analysis suggests that this could range from between $929 and $236 in yearly mortgage cost savings, depending on a family’s income. This effectively would shift the fee’s proceeds from supporting affordable rental housing for families at or below 30 percent of AMI, and community development efforts that support LMI communities, to helping some unknown number of aspiring homebuyers with a modest subsidy.

Such a subsidy might be justified if many consumers would be denied mortgage credit without it, or a ready means to provide lower cost insurance to the same borrowers was not readily available. But, in reality, FHA is and will remain consumers’ alternative when it can offer a better “sticker price” than privately capitalized credit insurance. (The same is true of insurance programs offered by the VA and USDA’s Rural Housing Services, but FHA will be the likely alternative for most consumers.)

An expansive and inclusive approach that consciously incorporates existing mission driven government supported mortgage credit insurance alongside that offered by the privately capitalized guarantors and their risk sharing partners like MIs would assure a broad range of credit pricing and availability through the proposed new securitization platform without needing to use the proposed new fee to subsidize market-priced risk. This might even spur competition from these private insurers, which could expand private capital’s role in serving more borrowers without requiring the proposed subsidy. It also could help strengthen FHA’s book by adding borrowers with relatively stronger credit and countering some of the adverse selection it otherwise will suffer.

Instead, the draft would use most of the 10-bps fee to reduce the impact of market driven pricing for some borrowers, and enable Mis and the guarantors to employ full risk based pricing without losing some borrowers to a cheaper FHA execution. Relying on FHA to provide this cross subsidy in the overall system also would reduce the impact of market pricing without needing to divert the fee.

The 10-basis point fee’s original purpose was to generate a dependable source of funding for desperately needed affordable rental housing production and preservation, and support for community development investments, along with a modest set aside for supporting market expanding activities through a newly structured mortgage finance system. It was meant to replace a far more modest annual assessment under the 2008 HERA legislation governing Fannie Mae and Freddie Mac, which has generated several hundred million dollars in support for the Housing Trust Fund and Capital Magnet Fund in each of the last few years. This would still be the highest and best use of the fee. Diverting it might move the proposed system’s reach a little further in FHA’s direction. But it would not actually add any new mortgage borrowers to the federal government’s overall coverage. Drafters could restore some of this funding by increasing the fee. But this would only add more cost for all consumers in the system while bypassing FHA’s ability to support a cross subsidy for higher risk borrowers.

Alternative Approaches

There are multiple ways the bill’s higher market-driven costs to consumers could be mitigated. The Mortgage Bankers Association 2017 proposal for multiple private guarantors, which is a partial blueprint for the draft, included utility-like regulation of new guarantors’ returns, controlling their costs and potentially enabling lower overall charges to consumers. Private mortgage insurers and guarantors could be regulated to use less loan level risk-based pricing and more broad pool pricing of risk. The new guarantors could be required to accept lower returns for loans serving a defined group of borrowers, as Fannie and Freddie are required today, forcing the cross subsidy to be borne by the guarantors benefitting from the securities guarantee. The drafters could reduce the amount of insurance in front of the government and use the government securities guarantee, which would not rely on loan level risk-based pricing, to cover more of the risk. They could encourage the development of risk sharing pilots combining FHA and private mortgage insurance as has been suggested by others for years. It also could include participation by other mission-driven market participants such as state housing finance agencies, Federal Home Loan Banks, and CDFIs like Self Help Venture Fund, which already operates a competitive and successful credit enhancement program with Freddie Mac, to diversify credit insurance offerings and deliver more value to consumers.

Even if the entire 10 bps in the Senate draft, estimated to be an annual flow of about $5 billion once the new system is up and running, is diverted to cross-subsidizing the private credit insurers, there will still be borrowers for whom the price of a loan under the new system is higher than the price of a loan with FHA insurance. Indeed, a recent Urban Institute analysis concludes that the draft’s proposed use of the fee is unlikely to reduce FHA’s market share from what it has today. But it will cost billions in explicit subsidies to produce this result. Relying more on FHA would expand its market share. But it would help create a broader range of credit pricing across the system, and probably strengthen rather than weaken FHA’s own insurance book.

Government programs like FHA and VA offer alternate, less costly mortgage insurance featuring broad risk pooling and attendant average risk pricing. They charge lower rates for weaker credit borrowers than privately capitalized insurers will offer because of their explicit government sponsorship and support, and their mission-based approach. They have a track record over more than 80 years. The sensible course would be to exploit this valuable resource and rely upon it as an affordable alternative form of primary credit insurance alongside the draft’s totally free market pricing model. Integrating these approaches would produce a broad policy approach to mortgage credit access that would mix public and private support to reach the best solution for taxpayers and borrowers. In contrast, the net effect of the proposed cross subsidy in the Senate draft really will be to use the 10-basis point fee to shift market share from affordable government-supported insurance that is already available at a competitive price to private insurance.

The draft also would give FHFA or its successor new responsibilities to design, execute and monitor other more direct forms of subsidy contemplated in the draft, such as down payment assistance, or consumer counseling support. But HUD, the VA and the Department of Agriculture’s Rural Development Administration, and state and local governments, already have the capacity and expertise to do this. If this is such an important outcome, the Housing Trust Fund’s purposes could be enlarged to include specific attention it. Why add these tasks to yet another federal department that should be laser-focused on the government’s total exposure to mortgage credit risk and the larger mortgage finance system’s stability and liquidity?

FHA Also Has Issues

New legislation need not tackle the myriad administrative problems plaguing FHA for the FHA (as well as VA and RHS) to continue to play a principal role in making mortgage credit affordable. But there is no doubt that much should be done to tackle FHA’s outdated technology, inadequate quality control and counterparty risk management. Lenders remain wary of FHA’s reliability. The loan level certifications lenders must sign, and the risk of False Claim Act prosecutions for errors in loan manufacturing are handicapping FHA’s market role. HUD’s leadership, lenders, consumer advocates and congressional leaders are pushing for sensible reforms to FHA and they need to continue to do so.

But FHA in the meantime will continue to play a major role in the mortgage finance system. Not including its ability to offer lower cost mortgage insurance that is average priced and provides access to lower wealth borrowers and those with weaker credit wastes a valuable resource and perpetuates a separation among the government’s various direct and indirect supports for mortgage credit.

The leaked draft’s design may not move forward. I joined with other co-authors to recommend a different approach that did incorporate FHA more fully. But any system that relies on private capital to absorb losses ahead of a government securities guarantee will have to confront the challenge of how to insure broad access for responsible borrowers in the face of private sector return expectations. Failing to take advantage of FHA in a comprehensive system would miss an important chance to use an existing tool and to more closely integrate the government’s approaches to supporting mortgage finance.

This article originally appeared here.

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The federal government’s appropriate role in supporting home finance and financial institutions in general has generated serious debate since the financial crisis began in 2008.  The other entities with special charters to support housing finance – Fannie Mae and Freddie Mac – were taken into conservatorship then and remain there today.  Congress has considered but not moved forward on any legislation to move them out of conservatorship, though the new Administration and several leading members of Congress have indicated it is a priority they plan to pursue.

In this context of potential far reaching changes in the federal government’s support for housing and home finance, CFA commissioned this extensive summary of the Federal Home Loan Banks and their evolving mission and membership.  Prepared by George Gaberlavage, Principal  at Orleans Street Policy Works, LLC and former Policy Integration Director at AARP, it is meant to provide consumers, elected and appointed officials with a comprehensive review of the system.  We hope it will help inform all those involved in considering the future of such support.

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“Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America and former Assistant Director of the Consumer Financial Protection Bureau. “For borrowers with solid income and stable employment, refinancing can help reduce the burden of student debt. But for others, they might be signing away their student loan benefits when times get tough.”

As the largest source of mortgage credit in America, Fannie Mae’s announcement could have a significant effect on the mortgage market and student borrowers. More than 43 million Americans owe $1.4 trillion in outstanding student debt.

Fannie Mae updated its Selling Guide to permit originators that sell loans to the mortgage giant to offer a new refinance option for the purpose of paying off a student loan. Proceeds from the refinancing will go directly to the student loan servicer to fully pay off at least one loan.

The policy change will likely have the effect of greater availability and lower interest rates for homeowners refinancing their mortgage to pay off student debt. Fannie Mae’s announcement expands upon a program launched last year with SoFi to offer a similar product.

Homeowners who tap home equity to pay off student debt give up their rights to income-driven repayment options on their federal student loans, which cap federal student loan payments at roughly 10% of their income. Income-driven repayment is a critical safeguard during periods of unemployment or other income shocks that help avoid the consequences of default. Homeowners may also be trading away loan forgiveness options available to teachers and others who work in public service.

Private student loans generally lack flexible repayment options like income-driven repayment. Borrowers with Parent PLUS loans also have more limited options, compared to other federal student loans.

According to Fannie Mae and SoFi, homeowners with outstanding cosigned student loans had an average balance of $36,000, and those with outstanding Parent PLUS loans had an average balance of $33,000.

Borrowers should also consider the tax implications of refinancing student debt. Borrowers who itemize their deductions and whose income is too high to qualify for the student loan interest deduction may be able to take advantage of tax benefits through the mortgage interest deduction when using mortgage credit to pay off student debt.

Fannie Mae also announced additional guidelines that impact how mortgage originators should consider student debt burdens. Mortgage originators can now consider a borrower’s monthly repayment burden as either the reported repayment level on a consumer’s credit report, 1% of the outstanding student loan balance, or a calculated payment that fully amortizes the loan.

According to data from the National Association of Realtors, 71% of non-homeowners believe their student debt has delayed them from buying a home.

“For too many borrowers, student debt feels like a big barrier to the dream of homeownership. While these changes won’t change those feelings overnight, they may help the mortgage industry adapt to the financial realities of today’s aspiring homeowner,” Chopra said.

The announcement underscores the need for close monitoring by the Consumer Financial Protection Bureau of student loan servicers and mortgage originators. The consumer agency has previously reported widespread failures in the student loan servicing industry, including inaccurate payoff statements and other practices that lead to default.

CFPB oversight will help to ensure that lenders offering student loan cash-out refinance products provide clear disclosures to borrowers and avoid engaging in illegal practices that previously plagued the mortgage market.

Contact: Rohit Chopra, rchopra@consumerfed.org

The Consumer Federation of America is an association of more than 250 non-profit consumer groups that, since 1968, has sought to advance the consumer interest through research, education, and advocacy.

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CFA Director of Housing Policy Barry Zigas has posted a discussion of the proposed rule on the Rooflines blog, which you can read in full here.

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The product adds underwriting flexibilities and caps risk-based fees for loans above 80 percent LTV with borrower credit scores of 680 at 150 basis points, less than for similar non-HomeReady loans.  It also requires only 25 percent MI cover on HomeReady loans with LTV’s above 90 percent. These should make Fannie Mae mortgages more competitive for the targeted low wealth and LMI borrowers and enable lenders to make more loans to these borrowers with a secondary market execution.

But the really game-changing features of HomeReady are its adoption of a standardized consumer education requirement and the incorporation of the product into Fannie Mae’s Desktop Underwriter® (DU) automated underwriting system while offering unlimited lender access to the product.  With the first Fannie Mae has established a new standard that will affect the entire housing education and counseling industry.  With the second it has broken a long-standing tradition of offering HomeReady’s antecedents in only limited quantities as part of individual lender contracts. By promising that DU® will flag loans that qualify for HomeReady even if the lender does not specify them as such, and by offering them without volume limits, Fannie Mae has brought a flexible low down payment loan into its mainstream business in an unprecedented way.

Homebuyer Education

Fannie has been a supporter of homeownership education and counseling since the beginning of its community lending business in the early 1990’s.  Both Community Home Buyer and My Community Mortgage required borrowers to certify they had received housing counseling (although this requirement was briefly suspended for MCM in the mid-2000’s).  While at first this requirement could only be fulfilled through a HUD-certified counseling agency, years of pressure from lenders and mortgage insurers led Fannie to broaden the requirement to permit these other actors and other methods in the mortgage process to provide it.  Given the self-interested nature of these players, and the increasing pressure to increase the velocity and efficiency of mortgage originations, these products’ counseling requirement became less standardized and, according to some, less comprehensive and meaningful at the products aged.

HomeReady requires that the borrower complete an on-line homeownership education course offered through a platform called Framework®.  It requires borrowers to complete the course and to foot a $75 fee for it.  While Fannie is encouraging consumers to also consult certified housing counselors (who would receive one-half the fee in that case) this will not be required.  Framework is sponsored by the Housing Partnership Network (HPN) and the Minnesota Homeownership Center and meets the requirements of the HUD Housing Counseling Program and the National Industry Standards for Homeownership Education and Counseling.

By picking one platform that is accessible to any consumer with online access in order to obtain HomeReady’s flexibilities and pricing, Fannie has reset the table for the future of homeownership education and counseling. Fannie has neatly cut through a decades-long debate about how to incorporate education into the loan process by adopting it.  The education and counseling industry will have to adjust to this standard now.  Efforts to further refine or expand the use of classroom or face to face counseling will have to start with the premise that targeted consumers will use the Framework curriculum and certification.

DU and Community Lending

The announced availability of HomeReady through DU without contract limits is a huge paradigm shift.  If the product actually succeeds in qualifying more LMI borrowers it means its growth will be hindered only by effective demand, while MCM and Community Home Buyer were constrained by budgeted supply.

If the biggest story in mortgage underwriting in the late 1990’s and early 2000’s was the introduction and widespread adoption of automated underwriting, one of the biggest in 2015 will be Fannie’s decision to make their new HomeReady product available on the platform.  MCM was offered only through manual underwriting until 2006.  This required lenders to pull these loans out of their newly developed default business processes, which slowed its adoption.  Moreover,  lenders only could access it through individual contract provisions and for fixed amounts specified in them.  As described in last week’s announcement, this is not the case with HomeReady.

Enabling DU to flag loans that are eligible for HomeReady is another accelerant that should increase its market penetration.  Rather than manually assess a loan’s eligibility for the increased flexibilities, lenders should be able to run all loans through DU and get a recommendation from the system if a loan qualifies.  This removes another process barrier for lenders and should increase consumer access to the product compared to a non-DU execution, or one that requires the lender to flag the loan as HomeReady eligible.

Lenders will be able to commingle HomeReady and other loans in MBS pools and whole loan commitments, another feature that should make using the product easier and more seamless for lenders.

New Product Features

The HomeReady product adopts a number of underwriting flexibilities that are designed to increase credit access for LMI borrowers.

• Non borrower income will be included in calculating debt to income ratios up from the default limit of 45 percent to as high as 50 percent, which should increase such households’ buying power.  Fannie Mae states in its product materials that its research shows such income is “sticky” and persistent, and as stable as income that does not include such sources.

• Allows non occupant borrowers, and rental payments, such as from a basement apartment, and boarder income can augment the borrower’s qualifying income

• Lower mortgage insurance requirements, though these weren’t specified in the announcement

• Use of nontraditional credit

• Allowing gifts, grants, Community Seconds® and cash-on-hand to be used for down payments

• Allowing manufactured homes and HomeStyle® renovation loans up to 95 percent LTV

Freddie Mac has not announced a comparable product yet.  But historically, Freddie has followed Fannie Mae in such initiatives after some period of time.

Fannie’s announcement promises further details through the rest of the year and expects to go live with the product on DU and accept HomeReady loan deliveries late in 2015.

This article originally appeared on Barry’s blog at Zigas & Associates.

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Today’s approval of mortgage finance reform legislation in the Senate Banking Committee is an important—but still insufficient—step toward a durable and equitable mortgage finance system.

Consumer Federation of America Director of Housing Policy Barry Zigas:

This legislation is a positive step in the ongoing debate about the future of the mortgage finance system. However, the bill still fails to provide sufficiently strong requirements that credit guarantors who form the heart of the system fully serve the broadest possible range of creditworthy borrowers and communities, especially those traditionally underserved by the market, such as communities of color and low and moderate income borrowers. We hope that further changes to S. 1217 or subsequent legislation that would strengthen its ability to assure equitable access to sustainable and affordable credit can still be made.

Center for American Progress Director of Housing Finance and Policy Julia Gordon:

While we cannot support the bill as it passed out of the Committee today, discussions over the past few weeks suggest many potential opportunities with participants from all sides to ensure that the bill creates the open and accessible mortgage market we seek. We believe it’s important for reform to continue to move forward, and for that reason, we hope the Senate can work to improve the bill as it moves toward the floor.

Contact: Barry Zigas, 202-939-1016

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy, and education.

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“The Senate Committee on Banking, Housing and Urban Affairs under Sens. Johnson and Crapo has capped a lengthy series of hearings, meetings with stakeholders and intensive discussions within the committee with a new draft bill that establishes an important series of bipartisan agreements that would benefit consumers,” Zigas said. “The bill does not provide everything CFA and other consumer and civil rights advocates had promoted; it is going to need much more work. But it is a starting point and we look forward to working with the Committee to improve it.”

The new draft, released midday Sunday, March 16, 2014, builds on an earlier bill, S. 1217, introduced by Sens. Bob Corker (R-TN) and Mark Warner (D-VA) and cosponsored by a bipartisan group of ten of their Committee colleagues.  The new bill would replace Fannie Mae and Freddie Mac, after a transition period, and establish a new Federal Mortgage Insurance Corporation (FMIC) to provide a federal guarantee to qualifying mortgage backed securities to cover losses to investors once a deep layer of private capital determined by FMIC is exhausted.

“Most importantly, the draft bill reaffirms the importance of a federal role to insure that sustainable mortgage credit is made available as broadly as possible to credit worthy borrowers, and that this role must include a federal guarantee of a defined kind of mortgage backed security,” Zigas said.  “We believe these two ingredients are key to insuring consumers have access to affordable, long-term fixed rate mortgages.”

In addition, he noted, the draft bill establishes a new fee of 10 basis points (10/100ths of a percent) on all outstanding guaranteed securities to finance a range of investments in affordable housing and community development; establishes a new Market Access Fund to foster innovation and expand liquidity in hard to serve markets; and directs the new federal guarantor to monitor the market and ensure that it is broadly serving all markets through the full range of business cycles through a new Office of Consumer and Market Access within the federal guarantor.

Support for Affordable Rental Housing

The Johnson-Crapo bill also would support financing for multifamily housing by building on the current multifamily business lines at Fannie Mae and Freddie Mac.  These businesses have been profitable throughout the Great Recession, unlike the companies’ single family credit guarantee business.  Their ability to continue to provide liquidity for rental housing was critically important when other sources of capital for this important segment dried up.  The bill would continue the basic risk-sharing models Fannie and Freddie have operated for years, but not at the companies.  The bill would require at least 60 percent of the each aggregator’s units financed through the FMIC’s guarantee authority to have rents not greater than 30 percent of a low income household’s income.  Such households are defined as having not more than 80 percent of the Area Median Income (AMI), determined by HUD and adjusted for family size.

“An adequate supply of capital for affordable rental housing is critical to the millions of Americans who rent their homes, and for emerging new households that cannot or do not wish to become homeowners now,” Zigas said.

Contact: Barry Zigas, CFA (202) 939-1016

Barry Zigas will be available for comment at 202-679-0169 throughout the day on Monday, March 17.

The Consumer Federation of America is an association of nearly 300 nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. www.consumerfed.org

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