Housing Finance System


The housing finance system is essential to creating a robust and competitive consumer mortgage market. The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, better known as Fannie Mae and Freddie Mac, are the two primary government-sponsored enterprises (GSEs). They are private companies that operate under a government charter in the secondary mortgage market. They buy home mortgages from primary lenders. This allows primary lenders to offer more loans, creating more mortgage credit in the economy for consumers. 

Fannie Mae and Freddie Mac were created in part to provide housing market liquidity and stability. In 2008, however, these companies collapsed because of the mortgage crisis. Congress established the Federal Housing Finance Agency (FHFA) to oversee them. FHFA placed Fannie Mae and Freddie Mac into conservatorship, effectively placing them under government control. Despite their collapse, the GSEs maintained a working mortgage system during the economic downturn that followed the 2008 mortgage crisis. In addition, they provided access to financing for new home purchases and refinancing so that many struggling borrowers could remain in their homes. 

Both Fannie Mae and Freddie Mac have decreased the total value of the loans they retain, as required by FHFA. But they still accounted for 48 percent of originations as of second quarter 2022. Federal Housing Administration and Veterans Administration loans accounted for 18 percent. 

Fannie Mae and Freddie Mac have repaid the government for funds advanced to them during the crisis. Nonetheless, there is much debate about how and when to end the conservatorship. Policymakers are considering possible reforms to the housing finance system. This is also referred to as GSE reform. Lawmakers, industry participants, and consumer advocates agree on the need to reform the housing finance system and address the future of the GSEs. There is no agreement, however, on how to do so. 

Access to credit for underserved groups: The GSEs have public-interest obligations in exchange for their implicit backing by the U.S. government. Their charters require them to promote credit for mortgage loans to underserved people and areas. This includes consumers with low and moderate incomes and those living in central cities, rural communities, and other underserved areas. 

Despite the size and importance of GSEs to the housing finance market and the obligation to support underserved consumers, they have not fulfilled their mandate to support credit access to communities of color. Their market penetration rates for Black, Hispanic/Latino, and American Indian and Alaska Native communities, and other groups that are discriminated against have historically been and continue to be extremely low. For example, Black and Hispanic/Latino people represent 13 percent and 19 percent of U.S. households, respectively. However, less than 4 percent and 11 percent of loans purchased by the GSEs were made to Black and Hispanic/Latino borrowers, respectively. Both the Black-white and Hispanic/Latino-white homeownership gaps are wider today than when the Fair Housing Act was passed over 50 years ago. The GSEs’ lack of support for markets that have not had equal access to the housing finance system has contributed to the homeownership gap. This significantly drives the racial wealth gap in the U.S. However, with new federal mandates, including those put in place by the GSEs’ regulator, they are beginning to develop programs to help address long-standing discriminatory impediments. 

GSEs could further expand access to credit for communities underserved by the housing finance system by eliminating loan-level price adjustments (LLPAs). These are fees GSEs charge lenders based on criteria such as credit score, loan type, or the ratio of the loan’s value relative to the home’s value (known as the loan-to-value ratio or LTV). These fees are passed onto borrowers in the form of a higher interest rate, which results in higher costs over the life of the loan. LLPAs can have a discriminatory effect on borrowers from communities of color, who tend to have lower credit scores. They also tend to have lower down payments, which causes a higher LTV. 

Another way the GSEs could expand access to credit for people from communities of color is by creating special-purpose credit programs (SPCPs). These offer special underwriting terms or pricing for groups that are economically disadvantaged. For example, they can offer downpayment assistance for consumers living in formerly redlined neighborhoods. They can also provide underwriting terms that decrease reliance on credit scores, such as by considering rental housing payment history. The Department of Housing and Urban Development issued guidance in December 2021 making clear that SPCPs generally do not violate the Fair Housing Act. The Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and FHFA issued responses to the Department of Housing and Urban Development’s new guidance encouraging financial institutions to develop SPCPs. 



Reform of government-sponsored enterprises (GSEs)

In reforming GSEs, policymakers should: 

  • Provide enough credit to build and buy both single-family homes and multifamily buildings. There must be sufficient housing to meet the needs of the nation, including those of households with low and moderate incomes. Reforms should support access to decent, affordable rental housing. Multifamily loans should be guaranteed. Reforms should ensure consistent access to credit and liquidity and a consistent flow of credit. This credit should be appropriately priced for market risks in both good and bad times. 
  • Ensure the systemic stability of the housing market. This will decrease the chance of housing market crises that affect the entire financial system. Risk should be understood and allocated appropriately. Reforms should create transparency and accountability, including by promoting standardized products when possible. 
  • Enhance consumer protections in the mortgage market. Reforms should promote equitable and fair access for all consumers and communities. The system should promote the long-term best interests of the borrower. This includes protecting borrowers against bad actors and creating default options to promote better outcomes. 
  • Preserve the availability of 30-year fixed-rate, penalty-free, prepayable mortgages at a reasonable cost to creditworthy borrowers. 
  • Ensure equal access to the secondary market for different types of financial institutions. Communities that have been historically underrepresented should have access to financial institutions and their products. 
  • Foster safe, affordable innovations in mortgage products. This includes reverse mortgages and residential care options that can meet a wide variety of needs for older people seeking to age in place. 
  • Improve oversight of credit risk across the market so fewer homeowners default on their mortgages. Regulation of credit risk should be comprehensive and robust, covering all aspects of the mortgage market, including secondary markets. Credit risk must be appropriately measured, priced, distributed, and overseen. 

Access to credit for underserved groups

Policymakers should ensure that the GSEs fulfill their mandate to support credit access to underserved communities, including people with low incomes and people of color. They should: 

  • eliminate loan-level price adjustments and other risk-based pricing that restricts access to credit for communities of color, and 
  • create special-purpose credit programs that expand access to mortgages for borrowers from formerly redlined communities.