Edward DeMarco, acting director of the Federal Housing Finance Agency, indicated in no uncertain terms at the recent SourceMedia Loss Mitigation Conference that the rules will be changing in the case of the government-sponsored enterprises and affordable housing.
Fannie Mae and Freddie Mac used to have to comply with stringent affordable housing quotas put on them by the Department of Housing and Urban Development. FHFA, though, has superceded HUD and has proposed having the two agencies conform to general market levels of affordable housing.
And instead of the Fannie and Freddie requirements, he suggested that the government consider direct assistance instead, lauding programs like the Federal Home Loan Banks' Affordable Housing Program and the state Housing Finance Agencies.
Much as we like the AHP and the fine work many HFAs do in their respective levels, there is an aspect of circular thinking here.
For many years, Fannie and Freddie have set the market levels for affordable housing. To look for the natural market levels, they would be looking at themselves.
Now, however, much of the affordable housing effort in the country is being done by the Federal Housing Administration, as the GSEs' levels of loans to those with FICO scores under 700 has shrunk to 11%.
There is an unspoken assumption (and a spoken one, in many cases) that affordable housing mortgages were a big cause of the mortgage bubble and default crisis. Well, yes and no.
Many affordable housing borrowers were targeted by subprime and predatory lenders, and that book of business, it's true, is performing disastrously. But Freddie and Fannie conducted conforming affordable housing business since the early '90s, with no disasters.
However, Freddie and Fannie have lost more than $200 billion between them, requiring a (to date) $145 billion bailout from taxpayers. Mustn't those huge losses have been caused by low-mod lending?
Well, Fannie and Freddie participated in the housing bubble by buying hundreds of billions of dollars of securities backed by subprime loans for their portfolios. That is the likely source of the worst of the losses.
Well-underwritten loans to immigrants, the underserved and minority borrowers will be a key component in the housing recovery. Lenders need to look beyond their fearful credit squeezes and start funding this growth area of the business, unless they are happy (and who could be?) with the business drooping along at its current depressed levels.
