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June 22nd, 2009

Do Lawmakers Have Fannie & Freddie’s Best Interests in Mind?



In a letter to Fannie Mae and Freddie Mac, Democratic lawmakers Barney Frank (D., M.A.) and Anthony Weiner (D., N.Y.) urged the government-sponsored agencies to loosen their lending standards to accomodate those buying condos:

In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70% of the units have been sold, up from 51%. Fannie Mae also won’t purchase mortgages in buildings where 15% of owners are delinquent on condo association dues or where one owner has more than 10% of units, which the firm sees as signals that a building could run into financial trouble. Freddie Mac will implement similar policies next month.

The lawmakers claim that the newer, more stringent lending policies “may be too onerous” and stand to threaten the recovery of the housing market. However, we argue the opposite since Fannie and Freddie have instituted these tougher rules in order to protect themselves (and potentially taxpayers) against further losses. Tougher restrictions, while limiting availability, produce more qualified borrowers, hence strengthening the marketplace, and improving their solvency.

“This is how we achieve a natural balance,” said HSH VP Keith Gumbinger. “These tighter rules were made to accommodate risk — the alternative of ‘giving mortgages away’ didn’t work either.”

As both agencies prepare a formal response to the lawmakers, it will be interesting to see how the political relationship between the two affects the final decision. While lawmakers want to see increased homeownership, Fannie and Freddie want to make sure their future investments are sound. If the lawmakers succeed in forcing Fannie and Freddie to weaken their restrictions, the results could tip the agencies back to the place they’re trying to dig themselves out of.

This push by lawmakers centers on a minority of the housing market. “Lawmakers want to tweak the rules to benefit a narrowly-defined audience,” says Gumbinger. “Is it really prudent at this stage of the game?” Moreover, the immediate response from Fannie and Freddie has been that the impact of their restrictions has not been as prominent as the representatives suggest:

Fannie Mae officials say the new rules haven’t been as taxing as some claim. The mortgage company said the 70% rule doesn’t apply to loan applications submitted through an underwriting program used by major lenders, and that hundreds of projects submitted through that program since March 1 have been approved even though their sales levels are below 70%. Developers are also able to apply for exemptions to the new policies for loans that are manually underwritten. Both Fannie and Freddie say they are preparing a response to the lawmakers.

Is this the beginning of the (inevitable) push by politicians to seek exceptions for other small factions of the housing market? “In theory, the market shouldn’t bend to you, you should bend to the market,” said Gumbinger. What is the logic behind weakening the agencies’ attempts to make their business stronger?

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One Response to “Do Lawmakers Have Fannie & Freddie’s Best Interests in Mind?”

  1. Barney Frank Leading The Charge For A Second Housing Crisis « Needs of the Many Says: June 24th, 2009 at 3:30 pm

    [...] Do Lawmakers Have Fannie & Freddie’s Best Interests in Mind? (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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