For decades, two government-sponsored entities, Fannie Mae and Freddie Mac, helped working class Americans get mortgages. Under affordable housing goals mandated by Congress in 1992, Fannie and Freddie were required to purchase prudent home loans made to low- and moderate-income borrowers.
That essential and powerful role in the national economy is fading.
Nine years after the U.S. government seized both of them at the height of the Great Recession, Fannie and Freddie remain under the control of the federal government. The good news is they’re profitable again. The bad news is they no longer play a significant role helping the working class obtain affordable home loans. GSE profits that should be used to increase lending for affordable housing are instead going into the U.S. Treasury to pay for other programs.
Today, many lower income borrowers aren’t able to get loans in the first place. Mortgage loans demand almost perfect credit scores and loads of money in the bank. Lending to low- and moderate-income borrowers declined 17 percent at the nation’s three biggest banks between 2010 and 2016, according to federal Home Mortgage Disclosure Act data.
That’s truly terrible news for people who want to buy homes but can’t — and it’s one reason homeownership is near a 50-year low.
Coupled with the Republican tax plans that would callously strip wealth from the working and middle class to give tax breaks to business owners and the rich (and expand the national debt by at least $1 trillion), the American Dream itself is under attack.
Upward mobility has never been easy. But tax, banking and other federal policies used to encourage it. Now, we’re seeing the opposite — a web of schemes led by President Trump and the GOP to help the rich get richer while everyone else is left behind.
We know that homeownership is the most reliable path to wealth building in America. It is by far the best way for working-class Americans to secure a place in the middle class.
That’s why we need to revive the GSEs.
The GSE affordable housing goals help people get mortgages, and that alone makes them vital to upward mobility in America. But home buying and wealth-building are not only matters for individuals. They strengthen neighborhoods, communities and the nation.
The impact of the GSEs is vast. They help homebuilders, brokers, realtors and mortgage lenders who participate and profit in a market that is bigger because the GSEs enable more people to buy homes. Nothing helps our economy more than the creation of sustainable, responsible mortgage loans.
The best and most obvious way to resume the wealth-promoting role of the GSEs is to release them from federal control, turn them into closely regulated, investor-owned and mission-oriented utilities, and allow them to rebuild their capital so they can enable more home loans to more people who need them.
Reprivatizing Fannie and Freddie would not result in a return of bad mortgage lending. Strong post-crisis laws and regulations ensure that both Fannie and Freddie and the entire financial system are safer. Fannie and Freddie now have a strong regulator and, like others in the banking industry, must follow federal lending rules to ensure irresponsible mortgage-origination practices never return.
One big lie about Fannie and Freddie is that they caused the 2008 financial crisis, because they made risky investments in order to meet their affordable housing goals. But that's a myth. Repeating it doesn't make it true. The national commission on the causes of the crisis looked closely at this question and concluded that the GSEs met their affordable housing goals without any risky investments. In the years leading up to the Great Recession they did make risky investments – but they did so to be more profitable, not to meet affordable housing goals. When those bad investments collapsed, the government stepped in and took over the GSEs.
In the run-up to the financial crisis, Fannie and Freddie made mistakes. They followed Wall Street investors into securities backed by high-risk mortgages. The results were disastrous. But that failure was an anomaly for two institutions that have played a life-changing and mostly invisible role for millions of homeowners. Fannie has been helping Americans buy homes since 1933; Freddie since 1970. Without them, millions of homeowners would not have been able to get their mortgages.
Now that they are stable, profitable and, like banks, better regulated, it's time for the government to get out of those businesses.
The issues are complex, but the big-picture goal is not: ensure the flow of affordable mortgages to the working class. The GSEs, which are now healthy and profitable, are uniquely focused on that task, and they are too important to be eliminated or broken up into pieces.
The dream of homeownership remains out of reach for too many households. Releasing Fannie and Freddie from federal control is an essential part of restoring it. It’s time to end the conservatorships of Fannie Mae and Freddie Mac.