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Senate GSE Reform Proposal: A Blow to Affordable Housing and Harmful to the Overall Housing Market

March 1, 2018
Mortgage Lending

Mark Morial, president and CEO of the National Urban League
Michael F. Molesky, senior financial economist
Mike Calhoun, president of the Center for Responsible Lending (CRL)

The proposed housing finance legislation would impose great harm on affordable housing efforts and the overall housing market. Proponents of the legislation do not address the damage the proposal would do by repealing the existing structural protections for equitable housing access for all areas of the country, all lenders, and all credit-worthy borrowers. In addition, their cost projections for the proposed system use assumptions heavily tilted toward the proposed system. When these are corrected, the cost of the proposed system is much higher, and its affordable housing program far less effective.

The current system, which was substantially reformed by the Housing and Economic Recovery Act of 2008, requires that those benefiting from government backing serve the public interest through enforceable obligations.

The proposed system weakens the housing market:

  • Repeals existing protections and incentivizes an increased number of new guarantors to maximize the benefit to themselves by serving the most lucrative areas of the country, the largest lenders, and the wealthiest borrowers.
  • Harms affordable housing repealing the duty to serve all credit-worthy borrowers, enforceable housing goals, and built-in equitable pricing for a far less effective proposed fee and unenforceable general aspirations to serve the full market.
  • Seriously undermines fair lending by insulating the new guarantors from review of whom they serve by blocking review of their practices, leaving them to the “business judgment” of the new guarantors.
  • Introduces huge risks to the overall housing market with its doubtful structure of guarantors with few and unenforceable duties.

The proposed system will also increase costs:

  • Provides less cross-subsidy to underserved borrowers than the current system. For a representative mortgage market like 2001, the average subsidy per loan is just over 8 bps in the proposed system, down from the over 15 bps subsidy provided in the current system.
  • Increases G Fees, after correcting assumptions about the current and proposed system. When correcting assumptions about capital costs, funding costs, the Market Access Fund and the return on capital held, the propose system results in a G Fee that is 32.2 bps higher, rather than the 3.7 bps increase described in the proposal.
  • Increases, not decreases, the average mortgage interest rate. After correcting assumptions about G Fees and the value of a government guarantee, the proposed system will result in a 22 bps increase in the average mortgage interest rate rather than the claimed 16 bps decrease.

It would be far better to continue ongoing housing finance reform based on a model of guarantors with a strong public interest duty and rigorous oversight to ensure that duty is safely fulfilled and protects taxpayers.

Download the full report.