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Higher Mortgage Costs and Reduced Credit Availability Would Result from FHFA Proposed Capital Rule for Fannie Mae and Freddie Mac, Coalition Says

Wednesday, September 2, 2020

In public comment letter, civil rights, consumer, and housing groups warn of proposal’s harm and its “acute impact on low- to moderate-income families and families of color”

Groups offer recommendations for the housing regulator to fulfill its and the Government-Sponsored Enterprises’ (GSEs) statutory public mission

Washington, D.C. – Today, the Center for Responsible Lending (CRL) along with a broad coalition representing millions of Americans released its public comment letter critiquing the Federal Housing Finance Agency’s (FHFA) proposed capital rule for Fannie Mae and Freddie Mac, Government Sponsored Enterprises (GSEs) overseen by the FHFA. Fannie and Freddie provide financial backing for about half of all mortgages in America. The amount of capital that the GSEs are required to hold has a major impact on the cost and availability of mortgage credit.The comment letter is linked here and its Executive Summary is included at bottom.

The letter was submitted by: CRL, Consumer Federation of America, The Leadership Conference on Civil and Human Rights, NAACP, National Association of Hispanic Real Estate Professionals, National Association for Latino Community Asset Builders, National Association of Real Estate Brokers (NAREB), National CAPACD, National Community Reinvestment Coalition (NCRC), National Community Stabilization Trust, National Fair Housing Alliance, National Housing Conference, National Urban League, and UnidosUS.

Fannie Mae and Freddie Mac receive substantial public support and have an explicit public interest mission. The letter warns that the “proposed rule’s approach would unnecessarily increase costs and reduce mortgage credit availability, with an acute impact on low- to moderate-income families and families of color.”

The letter states that “the proposed rule erroneously treats the GSEs as banks and therefore requires bank-like capital. This leads to gratuitously high capital levels that run directly contrary to the GSEs’ charter mission to promote access to mortgage credit to underserved borrowers, to serve a countercyclical role in the mortgage market, and to FHFA’s duty to reasonably support the safety and soundness of the GSEs and U.S. housing finance system.”

The comment letter says that the FHFA’s plan is “critically flawed as written” and makes several technical recommendations. Additionally, the letter recommends that the GSEs should be regulated as utilities to promote affordability and more equitably serve low- to moderate borrowers and families of color, as well as to promote safety and soundness of the GSEs. The Center for Responsible Lending has issued a report outlining why and how to “Treat Fannie And Freddie As Utilities.”

The following is the introduction and executive summary of the comment letter, the full text of which is linked here.

Introduction and Executive Summary

Thank you for the opportunity to comment on the Federal Housing Finance Agency’s (FHFA’s) re-proposed rule on capital requirements for Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs).

In our view, the proposed rule erroneously treats the GSEs as banks and therefore requires bank-like capital. This leads to gratuitously high capital levels that run directly contrary to the GSEs’ charter mission to promote access to mortgage credit to underserved borrowers, to serve a countercyclical role in the mortgage market, and to FHFA’s duty to reasonably support the safety and soundness of the GSEs and U.S. housing finance system.

The proposed rule’s approach would unnecessarily increase costs and reduce mortgage credit availability, with an acute impact on low-to moderate-income families and families of color. It would do this directly, by pricing out of the GSE channel many borrowers with lower credit scores and higher loan-to-value (LTV) ratios, and indirectly, by pricing out higher credit score and lower LTV borrowers that generate much of the current system’s cross subsidy to makeits loans more affordable.

The rule would hamstring the GSEs in fulfilling their countercyclical mission in a crisis. It would shrink the conventional market’s footprint, likely shifting significant volume to FHA, and leave more of the mortgage market subject to the swings of portfolio and PLS markets, which tend to dry up quickly in times of stress, including the financial crisis of 2008.

And the rule would not reduce risk to the overall housing finance system, but rather simply redistribute and concentrate it. By removing the GSEs’ incentive to distribute their credit risk, the rule would lead to more risk being held at the GSEs despite their smaller market share.

Moreover, consistent with the GSEs’ mission, FHFA should consider the impact on low-to moderate-income borrowers and borrowers of color. We support FHFA’s attempt to provide a more level application of capital requirements across risk levels to reduce the relative penalty that lower-wealth families pay for large-scale and systemic events over which they have no control and from which they disproportionately suffer. However, the combination of excessive overall capital requirements and a minimum that is too high for low-risk loans in the proposed rule would result in net increases in costs for lower-wealth families. As described in section IV, the proposal would have a disproportionate impact on people of color, intensifying pricing disparities and making mortgage credit more expensive and less available, thereby aggravating the racial wealth gap.

The proposed rule is thus critically flawed as written. We recommend that FHFA:

  1. Refrain from adopting bank capital rules for the GSEs;
  2. Count a portion of guarantee fee revenue as capital for risk-based capital requirements;
  3. Treat properly discounted CRT as a component of required credit risk capital;
  4. Eliminate the punitive stability capital buffer and the countercyclical capital buffer;
  5. Lower the leverage ratio to the alternative proposal from the 2018 proposed rule of 1.5% for trust assets and 4% for retained portfolio; and
  6. Regulate the GSEs as utilities to promote affordability and more equitably serve low-to moderate borrowers and families of color, as well as to promote safety and soundness of the GSEs.

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Press Contact: matthew.kravitz@responsiblelending.org