Frequently Asked Questions
Reforming our housing finance market is a challenging, complex issue. Below are some of the most frequently asked questions we receive. Please use the links that follow to see if your question is answered.
They are government-sponsored enterprises, or GSEs, that are chartered by Congress to help underwrite home mortgages. Their primary function is to package loans made by lenders into mortgage backed securities, which can be sold to investors along with a guarantee that principal and interest on the underlying mortgages will be paid in full. During the 2008 economic crisis, the government took Fannie and Freddie into conservatorship, assuming all powers of the company’s directors, officers, and shareholders. The entities remain in conservatorship today, fully controlled by the government.
During the height of the housing bubble, Fannie and Freddie began acting like highly-leveraged hedge funds, purchasing as investments nearly 40 percent of private label subprime securities and inflating the housing bubble in the process. Underwriting standards deteriorated significantly, and many of the loans issued were far from safe and secure. The companies held just 45 cents of capital for every 100 dollars in mortgages they guaranteed. Because they were so highly-undercapitalized, U.S. taxpayers ended up footing the bill to bail them out once prices began falling, to the tune of $187 billion.
In 2008, Fannie and Freddie were placed into temporary government control, or conservatorship, since they did not have enough capital to support expected losses. The government assumed control of these two multi-trillion dollar companies, with combined portfolios exceeding five trillion dollars, and committed to invest up to $200 billion in the companies to keep them operating, avoiding major disruptions in the market. Ultimately, it cost taxpayers more than $180 billion to bail them out. This conservatorship has lasted much longer than was initially expected.
The Federal Housing Finance Agency defines a conservatorship as “[t]he legal process in which a person or entity is appointed to establish control and oversight of a Company to put it in a sound and solvent condition. In a conservatorship, the powers of the Company’s directors, officers, and shareholders are transferred to the designated Conservator.” As conservator, the government basically runs the companies and guarantees any losses. Since the crisis, the government has guaranteed no less than 95 percent of the mortgage-backed securities market in any given year, leaving no room for the private market to re-enter and compete with the federal government. Without private market participation and investment, taxpayers remain in the first-loss position in the event of another housing downturn.
It ends the government conservatorship, winds down these too-big-to-fail companies and transitions to a new system that relies on private capital to fund housing and makes taxpayer exposure to housing market risk extremely remote. It also requires strong underwriting standards to ensure minimum levels of home equity and an ability to repay for borrowers, preventing the creation and marketing of toxic mortgages.
The legislation requires that 10 percent private capital stand in front of the taxpayer on any guaranteed securities. This amounts to billions of dollars in private capital ahead of the taxpayer. With our legislation in place, the market could sustain an economic downturn more than twice as large as the most recent crisis and taxpayers would be protected. Moody’s Analytics’ Mark Zandi said “[10 percent private capital] would provide a fortress financial foundation, all but eliminating taxpayers’ exposure to risk.”
This bill ensures that the 30-year fixed mortgage will continue to be available to a wide range of potential homebuyers.
The government will continue to dominate the housing market, taxpayers will continue to bear the full risk of losses, and economic recovery will be limited by the market and legal uncertainty surrounding the conservatorship.
After Fannie and Freddie were bailed out in 2008, hedge funds and other investors began buying up shares as many other investors sold their own. Shareholders have sued the federal government over revisions made in 2012 to the Preferred Stock Purchase Agreements that were part of the terms of the 2008 bailout. This issue is going to be resolved by the courts and not by Congress.
Our community banks and credit unions are experts at mortgage lending in rural areas. The bill establishes a small lender mutual cooperative designed to provide these institutions, and others, cost-efficient access to the secondary mortgage market. Additionally, the mutual will make it easier for small lenders to retain mortgage servicing rights, thus allowing them to continue their tradition of relationship banking. Numerous other provisions complement the establishment of the mutual and ensure the new system will continue to serve rural areas.
First, by placing more private capital in front of taxpayers, the legislation ensures that private capital will bear most, if not all, potential future losses. Second, the legislation replaces these too-big-to-fail entities with numerous private firms and establishes a process to resolve those firms if they become insolvent, ensuring that taxpayers will not be called upon to bail them out. Finally, Fannie and Freddie played a key role in inflating the housing bubble that led to the recent financial crisis. By eliminating them and establishing strong new underwriting standards, the legislation significantly lowers the chances of another collapse of that magnitude.
No. Unlike Obamacare, which increases the government role in the health care industry, this legislation decreases the role of government in the housing industry by winding down Fannie and Freddie, ending the government domination of the housing market, and re-establishing the private sector as the engine of housing finance.
