110th CONGRESS, LEGISLATIVE ISSUES A - Z
GOVERNMENT SPONSORED ENTERPRISES (GSE) REFORM
ISSUE: Congress established the secondary mortgage market in order to increase liquidity in the residential mortgage finance market and promote access to mortgage credit at a time when middle class Americans could not obtain affordable mortgages to purchase a home.
Fannie Mae was chartered in 1938, as the Federal National Mortgage Association, with the responsibility of creating a secondary market for home mortgages and operated under direct federal control. It was privatized by legislation enacted in 1968 and became fully private in 1970. Fannie Mae is a private, shareholder-owned company whose stock is traded on the New York Stock Exchange.
Freddie Mac is a stockholder-owned corporation, chartered by Congress in 1970, to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass-through securities and debt instruments in the capital markets. By doing so, Freddie Mac indirectly decreases housing costs and provides better access to home financing.
The Federal Home Loan Banks (FHLB’s) are regional wholesale banks where community financial institutions turn for funds. The twelve regional banks, which are cooperatively owned by over 8,000 community financial institutions members, provide loans that are referred to as advances. These advances, which are provided at lower rates than are available in the commercial market, are a low cost source of funds that range in duration from overnight to 20-year loans and come with fixed, floating and adjustable rates.
Strict oversight of these Government Sponsored Enterprises (GSEs), particularly Fannie Mae and Freddie Mac, has become a priority of many members of Congress, particularly with past accounting scandals. In addition, the crisis in the subprime mortgage industry has focused attention on the loan portfolio size of these two secondary mortgage market giants, as well as hedge funds and other investors who hold large portfolios of securitized bundles of subprime mortgages.
CUNA POSITION: Because many credit unions and their members benefit from the financing available through the GSEs, CUNA seeks to ensure that the secondary mortgage market remains vibrant and healthy.
Any major overhaul of the secondary mortgage market could have a significant effect on the housing market and those who could be affected the worst would most likely be those of modest means, whom credit unions serve as part of their mission. Thus, CUNA opposes arbitrary caps placed on the loan portfolios of Fannie Mae and Freddie Mac as this would severely limit credit union’s access to the secondary mortgage market.
IMPACT ON CREDIT UNIONS: Credit unions that offer conforming home loan mortgages to their members must comply with the underwriting standards required by Fannie Mae and Freddie Mac. Any significant changes to the current process could impact the access credit union members have towards affordable home ownership opportunities.
STATUS/OUTLOOK: On May 22, 2007, the House of Representatives overwhelmingly passed H.R. 1427, the Federal Housing Finance Reform Act of 2007. This legislation creates a new, independent regulatory structure for housing government sponsored enterprises (GSE), namely Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
The bill also creates an affordable housing fund, funded by 1.2% of the GSE’s total loan portfolio. The Congressional Budget Office has estimated that this provision will transfer $2.24 billion from the GSEs to state housing agencies over the next five years.
The legislation also raises the GSEs’ conforming home mortgage loan limit for certain areas with high housing costs. In these areas, the bill would raise the limit up to 50% from its current $417,000 cap for single-family homes up to $625,500 (the current conforming loan limit in the high cost residential markets of Hawaii, Alaska, Guam and the U.S. Virgin Islands).
Before passing the House bill, that chamber passed an amendment sponsored by Reps. Melissa Bean (D-IL) and Randy Neugebauer (R-TX), which would empower the newly-created regulator to restrict or cap Fannie's and Freddie's loan portfolios if it determines that they have reached a size or composition that threatens the safety and soundness of the two mortgage giants.
In the Senate, Senator Christopher Dodd (D-CT) has indicated that he is eager to shore up the housing GSEs and restore the public’s confidence in their safety and soundness. In addition, four Republican Senate Banking Committee members have introduced legislation, S. 1100, to overhaul the federal housing GSEs. A Senate Banking Committee Democrat, Charles Schumer (D-NY) has introduced legislation (S. 2036) that would temporarily raise the GSE conforming loan limit in eleven high-cost areas by up to 50 percent. The bill also temporarily raises the GSE portfolio limits by 10 percent, with 50 percent of the profits from that increase earmarked to assist homeowners struggling to make monthly subprime mortgage payments. House Financial Services Chairman Frank has introduced similar legislation.
Many inside and outside of Congress have urged the GSEs to help ease the current crisis in the subprime mortgage industry by providing liquidity in the secondary mortgage market. Up until September of 2007, Fannie and Freddie were unable to ease the burden on the secondary mortgage market by purchasing more securitized loan packages. Last year, the federal housing GSE regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), capped Fannie’s portfolio at $727 billion and Freddie’s at $724 billion. Geoffrey Bacino, a member of the Federal Housing Finance Board, which regulates the Federal Home Loan Bank System, wrote OFHEO Director James Lockhart, urging him to lift the caps to allow more liquidity in the mortgage market. (see link to letter below) OFHEO, with the agreement of the Bush Administration, decided to leave the caps in place to ensure the safety and soundness of the two GSEs. House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT), urged the Administration to lift the loan portfolio caps on Fannie and Freddie.
In September 2007, OFHEO compromised and authorized Fannie Mae and Freddie Mac to securitize $20 billion more in subprime mortgages in the following six months. The portfolio cap for both companies will be capped at $735 billion.
Recently, Senator Schumer and Congressman Frank reached an agreement on legislation to allow Fannie and Freddie to raise their portfolio caps by 10 percent for a six-month period. The bill would mandate that 85 percent of the increase, approximately $125 billion, would be used to aid subprime borrowers seeking to refinance their loans. This legislation is not intended to replace a comprehensive GSE reform effort favored by many in Congress. It is designed as merely a stopgap measure to provide some temporary liquidity to the secondary mortgage market. Senate Banking Chairman Dodd has been generally supportive of raising the portfolio limit.
The Federal Reserve reacted this summer to the national credit crunch by pumping tens of billions of dollars in temporary reserves into the national financial system, hoping to alleviate liquidity shortfall concerns by investors. In addition, the House Financial Services Committee held a hearing on September 5, 2007, to examine the summer turmoil in the credit and mortgage markets.
OFHEO recently announced that the maximum 2008 conforming loan limit for single-family mortgages would remain unchanged at $417,000 in most areas of the country. The conforming limits on first mortgages will remain $533,850 for two-family loans, $645,300 for three-family loans, and $801,950 for four-family loans. For second mortgages, the limits are $208,500 (one-family), $266,925 (two-family), $322,650 (three-family) and $400,975 (four-family).
CUNA will continue to closely monitor this rapidly changing situation to ensure that a healthy secondary mortgage market is available to ensure the liquidly that financial institutions need to finance home mortgages
CONTACTS: John Hildreth, (202) 508-6724, jhildreth@cuna.coop.
