Treasury Fannie/Freddie Report

Published by Michael Novogradac on Friday, February 11, 2011 - 12:00am

For those interested in affordable rental housing, here are some excerpts from Treasury’s Fannie/Freddie Plan, “Reforming America’s Housing Finance Market,” worth noting.

To track the restructuring of Fannie and Freddie, go the GSE Reform Hot Topics page.

  • The plan provides for continuing to wind down Fannie Mae and Freddie Mac’s investment portfolio at an annual pace of no less than 10 percent.
  • In Section III (titled: A System with Transparent and Targeted Support for Access and Affordability) the reports provides:
    • A reformed and strengthened FHA.
    • A commitment to affordable rental housing. 
    • Measures to ensure that capital is available to creditworthy borrowers in all communities, including rural areas, economically distressed regions, and low-income communities.
    • A flexible and transparent funding source to support targeted access and affordability initiatives.

      A renewed commitment to affordable rental housing

      The Administration will explore ways to provide greater support for rental housing. One option would be to do so by expanding FHA’s capacity to support lending to the multifamily market. Key to this would be utilizing existing multifamily expertise so that FHA and other entities continue the industry’s current best practices and retain valuable human capital. We will consider a range of reforms, such as risk-sharing with private lenders, to reduce the risk to FHA and the taxpayer, and the development of programs dedicated to hard-to-reach property segments, including the smaller properties that contain one-third of all rental apartments.

      Dedicated funds for targeted homeownership and rental affordability

      Although FHA and other federal affordable housing policies do a great deal to provide access and affordability, we recognize that a more balanced system will require additional resources to address clear gaps. The Administration will thus advocate for a dedicated, budget-neutral financing mechanism to support homeownership and rental housing objectives that current policies cannot adequately address. This funding stream would support the development and preservation of more affordable rental housing for the lowest-income families to address serious supply shortages, similar to the Housing Trust Fund that the President has proposed to be capitalized. It would support down-payment assistance and counseling to help qualified low- and moderate-income homebuyers, in a form that does not expose them or financial institutions to excessive risk or cost. We would scale up support for proven nonprofit partnerships for affordable housing production and preservation that can attract much larger amounts of private capital. And funding would help to overcome market failures that make it hard to develop a secondary market for targeted affordable housing mortgages, such as that for small rental properties.

      These components target specific needs in flexible ways that can engage a range of partners and respond to local priorities and opportunities. We will work with Congress to ensure that funding will be budget neutral, transparent, and targeted to clearly defined objectives and programs

  • Regarding the Options for the Long-Term Structure of Housing Finance, the report identifies four key factors to consider:
    • Access to Mortgage Credit
    • Incentive for Investment in Housing
    • Taxpayer Protection
    • Financial and Economic Stability

      Regarding Incentive for Investment in Housing

      Government support makes investment in housing more attractive. While this can broaden access and lower costs for borrowers and communities, it can also draw investment away from other areas that may lead to greater long-term growth or job creation and it can inflate the value of housing assets, possibly leading to larger boom and bust cycles. Without government support, however, some of the capital invested in the housing market today may simply move to investments outside the United States that offer better risk weighted returns. Other government policies, such as tax incentives like the mortgage interest deduction and other tax credits can also encourage investment towards housing over other sectors in the economy.
  • The 3 Options are:

    Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.
    Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.
    Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.