Barriers To GSE Reform And Homeownership Among Minorities, Low-Income
Discussion on barriers to GSE reform and homeownership among minorities.
The Supreme Court has weighed in on one of the lawsuits involving Fannie Mae and Freddie Mac. However, it didn’t move the case forward much, as the court remanded the case back to the lower court for additional rulings.
In the meantime, the real estate industry hangs in the balance as the courts decide what should be done with the government-sponsored enterprises (GSEs). Sustainable homeownership and minority homeownership will be greatly affected by the outcome of the cases involving Fannie and Freddie.
Here's What The Supreme Court Had To Say
The big headline about the Supreme Court's opinion in the Collins case was that the structure of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, was unconstitutional. The court ruled that the FHFA could not be an independent agency and that its director must answer to the president. It paved the way for President Joe Biden to replace Mark Calabria as head of the FHFA, which he did just hours after the ruling was released.
The court also provided an opinion about the so-called net worth sweep, which preferred shareholders had hoped would be declared illegal. The Supreme Court ruled that the net worth sweep was legal but that it could only be done for the correct purpose.
The debate now moves to whether or not the sweep was done with a legal purpose in mind, like rescuing the GSEs from bankruptcy, although court documents had revealed that the government apparently lied about the solvency of the GSEs when it instituted the net worth sweep.
A Big Hole Left By The Ruling
One issue left hanging that the real estate industry should be concerned about is Fannie and Freddie's ability to retain capital. There's no denying that the GSEs need capital to operate, and it will have a great impact on housing reform in general. If Fannie Mae and Freddie Mac can't build up enough capital, they won't be able to serve as many low-income and minority Americans in providing mortgages.
"I think housing reform can affect the real estate industry, and it can improve first-time homeownership," said Tim Pagliara of CapWealth, author of the book Another Big Lie: How the Government Stole Billions from the American Dream of Home Ownership and Got Caught. "It can improve minority homeownership, which has suffered as a result of these entities still being in conservatorship."
The Mortgage Bankers Association wants to see Fannie and Freddie provide sustainable credit liability to the conventional single-family and multifamily mortgage market. The organization also wants the GSEs to provide equitable access to lenders of varying sizes and business models. However, they need capital to do this, and the government has prevented them from building capital by sweeping all of their profits into the Treasury.
The GSEs' Shortcomings In The Real Estate Market
In a recent presentation, the AEI Housing Center argued that Fannie Mae and Freddie Mac's affordable housing products like HomePossible and HomeReady are not effective in promoting sustainable homeownership. The GSEs started buying conventional loans in 1971, but at 65.6%, the homeownership rate is now little changed from where it stood in 1971.
AEI said Fannie and Freddie and the Federal Housing Administration had made first-time buyer mortgages with high default rates common. Census and ACS data back up the AEI Housing Center's argument, revealing that the rate of homeownership for low-income households has fallen over the last 30 years. The problem is that the credit easing policies put in place by the government have failed to boost homeownership among low-income households.
Signs Of Hope
While he was director of the FHFA, Mark Calabria made it his goal to get Fannie Mae and Freddie Mac out of conservatorship. Although he came up short, he worked toward that goal. It seems clear that the best way for the GSEs to boost homeownership among minorities and low-income households is to get them out of conservatorship. Fox Business reported that in 2019 and 2020 under Calabria's leadership, the FHFA saw the biggest increase in annualized homeownership among black Americans.
By firing Calabria, Biden has ended the push to get the GSEs out of conservatorship, potentially working against one of the very goals he has set for his administration. If the courts can't fix Fannie's and Freddie's ability to save capital, it seems unlikely that the problems with the real estate industry will be fixed, as both GSEs are crucial to the backbone of the industry.