The Current Mortgage Market: Undermining Housing Affordability with Politics (EventID=115954)

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Connect with the House Financial Services Committee Get the latest news: https://democrats-financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinancialCmte Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Wednesday, May 17, 2023, at 2:00 p.m. (ET) Housing and Insurance Subcommittee Chairman Congressman Davidson and Ranking Member Congressman Cleaver will host a hearing entitled, “The Current Mortgage Market: Undermining Housing Affordability with Politics." ___________________________________ Witnesses for this one-panel hearing will be: • Mr. Edward J. DeMarco, President, Housing Policy Council (HPC) • Mr. Kenny Parcell, President, National Association of REALTORS® • Dr. Clifford Rossi, Professor-of-the-Practice and Executive-in-Residence at the Robert H. Smith School of Business, University of Maryland • Ms. Janneke Ratcliffe, Vice President, Housing Finance Policy Center, Urban Institute ___________________________________ Background General FHFA/GSE Background The Federal Housing Finance Agency (FHFA) is an independent regulatory agency responsible for overseeing the housing government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac. FHFA, which was created by the Housing and Economic Recovery Act of 2008 (P.L. #110– 289), is headed by a single Director appointed by the President and confirmed by the Senate to a five-year term. The current Director, Sandra Thompson, was sworn in following her confirmation in June of 2022. She previously served as FHFA’s Acting Director. FHFA’s primary statutory mission is to regulate the GSEs. Its Director is charged with ensuring that “each regulated entity operates in a safe and sound manner.” The GSEs are private corporations chartered by the federal government with special benefits. They were established to make homeownership more available and affordable for lower- and middle-income Americans. Congress established Fannie Mae during the New Deal. It later created Freddie Mac in 1970 as its competitor. The GSEs were chartered to provide liquidity in the mortgage market and promote homeownership for underserved groups and locations. The GSEs are not mortgage lenders. They do not lend directly to individual borrowers. Instead, they purchase mortgages from lenders, guarantee them, and package them in mortgage-backed securities, which they either keep as investments or sell to institutional investors. In addition to being their regulator, FHFA serves as conservator of the GSEs. Since their financial collapse in September 2008, both Fannie Mae and Freddie Mac have been under separate government conservatorships. This means they are financially backed by taxpayers and remain significantly undercapitalized for their prominence and size. In fact, at the end of 2021, the GSEs combined owned or guaranteed approximately $7.3 trillion in single-family and multifamily mortgages. This represents more than half of all the $12.8 trillion in mortgage debt outstanding in the United States. Background on Loan Level Price Adjustments (LLPAs) and Guarantee Fees When purchasing loans, the GSEs charge lenders guarantee fees (G-fees) to help offset their risk. According to FHFA, the statutory charter for each GSE “authorizes it to impose fees and, based on that authority, each [GSE] has historically set fees for the guarantees provided for timely payment of principal and interest on securities issued.” The two G-fees currently assessed include an ongoing fee collected over the life of the loan and a one-time upfront fee when the loan is purchased, frequently called a loan level price adjustment (LLPA). LLPAs were first implemented in March 2008 as a response to the financial crisis. As financial conditions worsened in the mortgage market, the GSEs recognized their ongoing G-fees would be insufficient to cover their risks. They needed a mechanism to increase their capital and better mitigate risk as they acquired new loans. LLPAs were introduced to provide more flexibility in pricing to ensure that fees for government-backed loans matched the risk-profile of the borrower. LLPAs only apply to loans purchased by Fannie Mae and Freddie Mac, and exclude mortgages backed by other government programs. Importantly, unlike ongoing G-fees, LLPAs are risk-based fees, meaning they vary by the individual attributes of the loan. This risk-based pricing is essential to LLPAs. It allows the GSEs to protect their balance sheets against unforeseen risks as well as taxpayers against the ultimate costs of borrowers defaulting on their loans. LLPAs are assessed based on various factors, including credit score, loan-to-value (down payment size), loan purpose, occupancy, number of units, and mortgage type. Risk-based pricing allows creditworthy borrowers to benefit because, in general, the higher the risk associated... Hearing page: https://democrats-financialservices.house.gov/events/eventsingle.aspx?EventID=410428