Affordable-Housing Goals Scaled Back
Wednesday, September 24, 2008
The federal regulator overseeing Fannie Mae and Freddie Mac said yesterday that the firms would play a smaller role this year in supporting affordable housing across the country than they have in the past.
The companies missed government-mandated affordable-housing goals in 2007, and "the miss will be larger in 2008," James B. Lockhart III, director of the Federal Housing Finance Agency, told the Senate Banking Committee.
The government sets goals for Fannie Mae and Freddie Mac to finance mortgages for people with low and moderate incomes, and Lockhart said he planned for the companies to continue that effort.
The government seizure of Fannie Mae and Freddie Mac left many housing advocates concerned about the fate of the housing trust fund, which Congress set up this year to assist the poor in buying and renting homes. The trust fund was to be supported by the mortgage giants.
Lockhart did not clarify yesterday whether the companies still planned to contribute to the fund. "I recognize the importance of the housing trust fund to many members of Congress," he told lawmakers. He will decide on that question "only after a careful and thorough review of existing conditions," he said.
In recent years, Fannie Mae and Freddie Mac have made grants to community groups and tapped the financial markets to provide low-cost financing for apartment construction projects. The government has said that the grants are under review but that funding for apartment projects would continue.
Judith Kennedy, chief executive of the National Association of Affordable Housing Lenders, urged the government to stick to its goals. "If there was ever a time Fannie and Freddie should be providing affordable mortgages, now is the time."
Lockhart's comments, the most extensive on the topic of affordable housing since the seizure of Fannie Mae and Freddie Mac, came as he explained to lawmakers why the government stepped in. Lockhart said the companies ultimately could not continue to cover mortgage losses without government support.
Fannie Mae and Freddie Mac purchased and guaranteed "many more low-documentation, low-verification and non-standard" mortgages in 2006 and 2007 "than they had in the past." He said the companies increased their exposure to risks in 2006 and 2007 despite the regulator's warnings.
Roughly 33 percent of the companies' business involved buying or guaranteeing these risky mortgages, compared with 14 percent in 2005. Those bad bets on mortgages led to billions of dollars in losses at the firms. "The capacity to raise capital to absorb further losses without Treasury Department support vanished," Lockhart said.
Fannie Mae and Freddie Mac bundle individual mortgages into securities, guarantee them against default and sell them to investors. They also buy mortgages from banks and other lenders and hold them in their own portfolios. The transactions allow the lenders to make more loans.
Lockhart said there were "significant and critical weaknesses" in both companies' financial conditions. Given the meltdown in the credit markets, both were unable to get loans or raise capital at affordable prices. That forced them to begin cutting back on mortgage financing.
"In the absence of access to new capital, the only alternative left to the firms was to cease new business and shed assets in a weak market," he said. "That would have been disastrous for the mortgage markets."
Now under government control, the companies might lower guarantee prices and once again loosen credit standards, Lockhart suggested. "Freddie Mac and Fannie Mae, in order to try to build capital, may have raised prices and tightened credit standards beyond what was necessary for sound underwriting."
Since the government takeover, Lockhart has appointed new chief executives and board chairmen to run the companies. Meanwhile, government examiners have been at the companies' headquarters and other locations continuously.