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Fannie Mae and Freddie Mac Mission and Regulation

Issue

The for-profit Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, need to be subject to world-class supervision for prudential operations and maintenance of their focus on their congressionally-chartered mission in support of the secondary mortgage markets.

Position Statement

ABA supports public policies that strengthen effective regulation and emphasize the secondary market nature of Fannie Mae's and Freddie Mac's charter-defined role. ABA supports legislation to create a new, independent regulator for Fannie Mae and Freddie Mac as a stand alone agency. ABA supports policies that explicitly prevent using the benefits of Fannie Mae's and Freddie Mac's quasi-government agency status to engage in primary market activities, including use of that status to eliminate or discourage competition among private sector participants in the mortgage lending, servicing and ancillary markets. ABA strongly recommends that Congress pass meaningful reform legislation that specifically outlines that Fannie Mae and Freddie Mac must stay in the secondary market, and it must permit the new regulator strictly to prevent them from entering the primary market. In addition, ABA will continue to monitor and work with the Congress on legislative proposals concerning conforming loan limits for high cost areas, as well as to review existing conforming loan limits, including procedures for making upward and downward adjustments. Through the legislation, the new regulator must also be given effective tools to direct Fannie Mae and Freddie Mac to adhere to their mission of targeting affordable housing.

Explanation

Specifically, ABA supports the following policies regarding appropriate Fannie Mae and Freddie Mac activities and appropriate Fannie Mae and Freddie Mac regulation, oversight, and disclosure.

Fannie Mae and Freddie Mac Activities

• Fannie Mae and Freddie Mac must be prevented from expansion beyond the intended boundaries of their federal charters.
• Fannie Mae's and Freddie Mac's role and mission should be clarified to (A) recognize the distinct and unique roles of both public and private sector entities; (B) acknowledge the capacity of private markets to meet particular housing and housing finance needs; (C) promote programs that do not constrict or impede traditional credit providers in meeting borrower needs; and (D) ensure that all loan purchase programs either promote home ownership or serve targeted populations.
• The regulatory regime should establish transparency and fair competition for products and services provided by Fannie Mae and Freddie Mac. The regulator should ensure that the advantages conferred on the enterprises are not used in a manner that disadvantages banks.
• There should be a clear distinction between "primary" and "secondary" market activities, and Fannie Mae and Freddie Mac should not be involved in activities of the primary market. (See definition of primary market activities from which Fannie Mae and Freddie Mac should be prohibited under "Non-legitimate Activities.")
• Marketing to or otherwise doing business directly with consumers is inconsistent with Fannie Mae's and Freddie Mac's statutory mission and charter authority. Fannie Mae and Freddie Mac should not purchase loans that are inconsistent with their federal charters or their conforming loan provisions. Only entities that meet high standards of financial strength and performance should be allowed to sell loans to or service loans for Fannie Mae and Freddie Mac.
• Patents obtained or technology developed by Fannie Mae and Freddie Mac should not be used to access the primary market. Fannie Mae and Freddie Mac should not be permitted to invest in technology development that would intentionally or unintentionally discourage private sector technology innovation or be used to control or channel mortgage business to or through Fannie Mae and Freddie Mac to the exclusion of competitive market alternatives. The regulator should be encouraged to issue a regulatory directive defining what constitutes unacceptable patent applications for Fannie Mae and Freddie Mac. The regulator should have ultimate authority to determine whether Fannie Mae and Freddie Mac are allowed to apply for or implement a patent.
• Fannie Mae's and Freddie Mac's housing goals should be structured to focus their mission more directly on affordable housing.
• There should be a consistent approach for defining what is "affordable housing" for Fannie Mae, Freddie Mac, and other government programs. In measuring whether Fannie Mae and Freddie Mac have met their affordable housing goals, HUD uses a different definition of that term than the one used by the federal banking agencies when measuring compliance with the Community Reinvestment Act. A consistent definition would be far more equitable and effective.
• The affordable housing goals and the process of measuring achievement should be examined periodically and, when necessary, adjusted to take into account feasibility, impact, and compliance.
• Fannie Mae and Freddie Mac should consider the needs of all its constituent sellers/servicers. These GSEs should avoid unnecessarily promoting the further consolidation of loan servicing and origination.

Fannie Mae and Freddie Mac Regulation, Oversight and Disclosure

The regulator of Fannie Mae and Freddie Mac should have authority over mission, programs, and safety and soundness and have sufficient enforcement authority to carry out its responsibilities.

• The regulator must possess similar supervision and enforcement powers to those of federal banking regulators to maintain safety and soundness and guard against systemic risk, and to insure compliance with all applicable laws.
• The regulator must have the resources and expertise to evaluate Fannie Mae's and Freddie Mac's performance, both as financially sound entities and as public purpose entities. The regulator should not be subject to the Congressional appropriations process.
• Capital requirements established for Fannie Mae and Freddie Mac should reflect the specific financial risks facing each, including realistic treatment of counter party risk. Freddie Mac's and Fannie Mae's capital requirements should be consistent with the capital requirements imposed on other federally regulated entities with similar risk profiles.
• The regulator should have authority to adjust all capital requirements.
• The regulator should establish appropriate housing goals for the enterprises.
• Congress should not directly govern portfolio holdings of Fannie Mae and Freddie Mac. However, in order to manage safety and soundness and systemic risk concerns, the regulator should have authority to adjust Fannie Mae's and Freddie Mac's portfolio holdings.
• ABA supports increased transparency and disclosure for Fannie Mae's and Freddie Mac's debt, equity, and mortgage-backed securities. Generally, disclosure should meet the standards applied by the SEC to public companies that issue securities.
• ABA opposes any attempt to eliminate Fannie Mae's and Freddie Mac's exemption from having to register their securities under the Securities Act of 1933.
• ABA also opposes proposals to revoke or limit Fannie Mae's and Freddie Mac's Department of Treasury line of credit.

Conforming Loan Limits

ABA supports codifying the procedures for adjusting conforming loan limits currently used by the secondary market GSEs. ABA supports OFHEO's decision to maintain existing loan limits for 2007 due to the previous year's decline in home prices for mortgage transactions captured by the Federal Housing Finance Board's (FHFB) monthly survey of loan terms and rates. Further, ABA supports OFHEO's announcement that further decreases in the housing price index will be netted against any increase in determining the 2008 limits and that, if the index declines again for 2007, the loan limits for 2008 will decline by at least the 2006 percentage decrease.

In addition, ABA supports legislation or a formal commitment from Fannie Mae and Freddie Mac on the targeted use of their unlimited statutory purchase authority for multi-family rental properties. Currently, there are no per-unit dollar cost limits on more-than-five-unit residential properties. This authority to purchase loans secured by multifamily rental properties should be used to target moderate-cost rental units and not as a means for Fannie Mae and Freddie Mac to expand their nationwide penetration into the upper end of the rental market.

Legitimate Secondary Market Purposes

These secondary market enterprises, and particularly their affordable housing activities, are a significant part of America's housing finance system. The specific statutory purposes for which Fannie Mae and Freddie Mac were originally chartered, and which continue to make up their mission today, include the following secondary market activities:

• To provide stability in the secondary market for residential mortgages;
• To respond appropriately to the private capital market;
• To provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing;
• To promote access to mortgage credit throughout the nation (including central cities, rural areas, and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
• To enhance the availability of financing for affordable housing.

To achieve these purposes, Fannie Mae and Freddie Mac receive significant statutory benefits which are not available to other mortgage market participants. Congress intended these legal and financial benefits to be used for a broad range of secondary market purchase and guarantee programs, with appropriate risk-management standards in place. The stability of the mortgage lending system would be threatened if Fannie Mae and Freddie Mac used these benefits to expand their activities beyond the mandate intended by Congress. The competitive advantage could allow them to dominate the primary market for residential, multifamily and commercial lending. Therefore, Fannie Mae and Freddie Mac are not permitted to participate in the primary market for home mortgage loans.

Non-Legitimate Activities

The activities listed below are examples of activities that serve no legitimate secondary market purpose and that ABA considers outside the scope of Fannie Mae's and Freddie Mac's charters:

• Identifying, soliciting, or contacting potential borrowers;
• Advising, pre-qualifying, and counseling borrowers;
• Negotiating and setting loan terms and options;
• Taking loan applications, obtaining third-party reports (such as appraisals), and handling all other elements of loan processing;
• Making decisions to extend credit to consumers, separate from underwriting by a primary market lender, which may be an improper application of an automated underwriting system;
• Providing or obtaining credit enhancement necessary for the sale of a mortgage to Freddie Mac or Fannie Mae, including but not limited to, mortgage insurance;
• Loan document preparation;
• Obtaining or providing other settlement services, including those related to loan closing or funding;
• Encouraging contact with mortgage brokers, real estate agents and developers who are the customers of mortgage lenders, or dealing directly with them as links to borrowers;
• Providing services to borrowers;
• Creation of Fannie Mae and Freddie Mac Internet sites and toll free numbers targeted at consumers;
• Intentionally or unintentionally discouraging competition in mortgage technological innovation and delivery;
• Fannie Mae and Freddie Mac development of proprietary technologies as a separate for-profit business line, rather than also developing or approving third-party standards for risk management and other purposes;
• Deployment of automated valuation models, which crowd out competing systems for computing appraised value;
• Advertising and other promotional activities directed to consumers by Fannie Mae and Freddie Mac or their charitable foundations, which appear to promote their corporate "brands."

Since the publicly supported secondary mortgage market for conforming loans became well established in the early 1980s, researchers have found that housing credit for home purchases at market rates has been readily available in most markets for a majority of homebuyers. While a continuing role exists for specially chartered secondary market entities within the housing finance system, the primary market works with great efficiency for loans to borrowers with average incomes and above. The primary market also has consistently outperformed Fannie Mae and Freddie Mac in the percentage of loans made to low-income families and to borrowers in underserved rural and central city areas.

Contact for further information: Joe Pigg (202) 663-5480.