On Aug. 31, 2020, Better Markets filed a comment letter with the Federal Housing Finance Agency (FHFA) regarding its proposed capital framework for Fannie Mae and Freddie Mac—also known as Government Sponsored Enterprises or GSEs. This framework is crucially important for ensuring that taxpayers do not have to bail out the GSEs like they did in 2008 and it will have a profound impact on the mortgage market. Yet FHFA’s proposal fails to assess the impact this framework would have on the core goals of preserving the GSEs’ financial stability and preventing taxpayer bailouts while at the same time ensuring that creditworthy borrowers have access to affordable mortgages
The GSEs play a crucial role in the country’s mortgage market and the broader economy. Fannie Mae and Freddie Mac have had an impact on many thousands of homebuyers during the past few decades by purchasing, guaranteeing and reselling mortgages that meet their underwriting standards.
These companies are privately owned, but because they are government-sponsored and structurally important to the mortgage market, they can safely assume that the government will save them if they ever face insolvency. That is part of the reason why the GSEs willingly overleveraged themselves in the lead up to the 2008 financial crisis, buying up huge numbers of toxic subprime mortgages. Their executives and shareholders reaped the benefits of this buying spree, and when the market collapsed in 2008, the government intervened, and taxpayers got stuck with the bill.
The only way to stop another bailout is to require the GSEs to hold enough capital in reserve to rescue themselves in case of another market crash. Robust capital requirements will also allow the GSEs to support the housing market even in the worst-case scenarios, protecting the hard-earned wealth of working-class Americans.
Unfortunately, the FHFA has failed to present the data and analysis necessary to know if the capital requirements will actually secure the GSE’s financial future. Nor has the agency considered the secondary impacts this proposal could have on the housing market. Instead, the FHFA has decided to simply apply a capital regime designed for banks to the GSEs despite the fact that they face a fundamentally different array of risks from banks.
For those reasons, Better Markets calls on the FHFA to withdraw and resubmit this proposal with an analysis showing the impact it would have on the financial stability of the GSEs as well as Americans’ access to affordable mortgage loans.
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