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Biden’s New Dilemma: How to Cut Housing Costs for Low-Income Borrowers

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Progressives fear Biden is too timid to change course at the powerful agency that oversees Fannie Mae and Freddie Mac, the two companies that make up half of the US $ 11 trillion mortgage market. Top Democrats are calling on Biden to quickly appoint a permanent leader – a post which, according to spokesperson for Senate Banking Chairman Sherrod Brown, is “vital to the administration’s goals of building a fair economy and must be filled quickly ”.

“They knew that moment was coming,” said Jesse Van Tol, CEO of the National Community Reinvestment Coalition, a housing advocacy group. “Why don’t we already have a candidate? “

Pressure from the left is a tough choice for Biden. For years, Democrats have pushed the agency responsible for Fannie and Freddie to expand homeownership and narrow the racial wealth gap. But making mortgages cheaper and more accessible could also increase the risk of default and increase the chances that businesses will need another bailout in the future. Fannie and Freddie were seized by the government in 2008 to avoid their failure during the subprime mortgage crash.

Industry analysts also say cheaper mortgages would do little to solve the fundamental problem in the housing market, which has seen prices skyrocket because housing supply is too low to meet demand. .

“There are real questions about what the FHFA can do on affordability given that we are in a supply crisis,” said Isaac Boltansky, director of policy research at investment firm Compass Point. “What’s it like to shift the dial a bit when we just don’t have enough houses?” “

Fannie and Freddie, which operate as government sponsored entities, are essential to homeownership in the United States as they buy mortgages from lenders and bundle them into securities for investors, thereby supporting liquidity of the mortgage market and ensuring affordability.

The Bush administration took control of Fannie and Freddie in September 2008, when companies were tasked with risky subprime loans, to avoid bankruptcy during the crisis in the housing market. They have since remained under government supervision. Attempts by Congress to revamp their operations have repeatedly failed, with tensions over housing affordability creating a political divide.

The Trump administration had been working to shrink Fannie and Freddie’s footprint and build their capital reserves so that they could be released as private entities and withstand another housing downturn. Democrats opposed the efforts, saying they would increase mortgage costs for consumers. Biden could draw opposition from Republicans if he chooses a regulator that turns the tide in an attempt to double housing affordability.

“Our housing finance system is in urgent need of reform,” said Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee. “I look forward to working with the next director of the FHFA to enact legislation that finally corrects flaws in the structure of the housing finance system, ends guardianship and protects taxpayers from future bailouts.”

Although Biden has come up with a series of home accessibility measures, controlling Fannie and Freddie may be his most effective tool.

The director of the FHFA “is the most powerful and largest housing work in America,” said David Dworkin, president and CEO of the National Housing Conference. “There are no seconds.”

Dworkin and other housing advocates want the FHFA to allow Fannie and Freddie to take more financial risk – which means more taxpayer-backed government intervention – in the name of expanding access to mortgages .

Among their ideas: Give Fannie and Freddie carte blanche to buy mortgages with lower credit scores, allowing private lenders to grant more of these loans; reduce costs; and increase investments that support the construction of multi-family rental properties.

Advocates want the FHFA to immediately remove Trump-era limits on Fannie and Freddie’s ‘high-risk’ loan purchases – characterized by a combination of low credit scores and high debt-to-income or loan-to-value ratios .

Allowing businesses to buy and guarantee more loans could cause lenders to issue more, extending credit to more low-credit, low-income borrowers without requiring higher down payments to offset the risk. Fannie and Freddie would foot the bill if the loan defaulted.

Dworkin said companies today have “almost no measurable risk in their business volume,” which includes borrowers with “extraordinarily high” credit scores and very few first-time buyers with low down payments.

“Their job is not to eliminate the risks,” he said. “It’s risk management. Their mission is to add liquidity to mortgage markets, not reduce it, and they need to get back into the liquidity business and add liquidity to underserved markets. “

Biden had the opportunity to change the leadership of the FHFA when the Supreme Court ruled that the agency’s leadership structure was unconstitutional and that the president should have greater authority to remove his director. Hours later, Biden sacked then-director Mark Calabria, a libertarian economist appointed by President Donald Trump who had made it his mission to downsize and consolidate Fannie and Freddie so they could fend for themselves. as private companies.

The Biden administration then appointed another senior FHFA official, Sandra Thompson, to serve as interim director. Thompson has worked at the FHFA since 2013 and previously worked for 23 years as a banking regulator at the Federal Deposit Insurance Corp., which monitors lenders for safety and soundness concerns.

On her first day at the helm of the FHFA, Thompson said she was committed to making sure the housing finance system works “in a safe and healthy manner” while keeping a “laser focus” on community investment. She said there was “a widespread lack of affordable housing and access to credit, especially in communities of color.”

Erika Poethig, special assistant to the president for housing and urban policy, said the administration is “determined to expand access to affordable homeownership, especially for low-income borrowers and communities of color facing challenges. challenges in the housing market “.

“In the months and years to come, we look forward to working with FHFA leaders to use the levers of housing finance to close the racial wealth gap, expand the housing supply and ensure housing affordability. housing, ”she added.

Housing advocates say they hope the administration chooses a permanent candidate with an aggressive affordability agenda, rather than leaving it in the hands of an official who focuses primarily on financial market risk.

“I think of Sandra Thompson’s world, but I don’t think Sandra Thompson shared a bold vision for Fannie and Freddie,” Van Tol said. “It seems to me to be sort of a safe gatekeeper choice, as opposed to someone with a vision to change institutions.”

Alysa James, spokesperson for Brown, the progressive chair of the Senate Banking Committee, said the senator “will work with the Biden administration to identify a candidate who will fight for all homes, in all parts of the country and for people of all incomes “.

Van Tol is already trying to warn the administration against appointing two prominent housing experts – Mark Zandi, chief economist at Moody’s Analytics, and Jim Parrott, former Obama economic adviser to the White House. He opposes their support for previous housing finance reform proposals that envisioned the revocation of the government charters of Fannie and Freddie, thereby canceling their affordable housing obligations.

Zandi and Parrott, who have been running for office in Democratic circles, declined to comment.

“I would be very disappointed if the administration appealed to someone who was attached to the failed ideas of the past,” Van Tol said.


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