More than four years after the federal government took control of Fannie Mae and Freddie Mac, lawmakers are finally making progress on housing finance reform. Two bills are making the rounds in Congress — one in the House, one in the Senate — each promising to wind down Fannie and Freddie and establish a new system for financing home loans. Meanwhile, in his remarks on the economy last week, President Obama promised to "work with both parties to turn the page on Fannie Mae and Freddie Mac, and build a housing finance system that's rock solid for future generations."
The choices we make today will decide the availability, affordability and sustainability of mortgage credit for years to come, dictating whether millions of working families have a safe and stable place to call home, whether they rent or own. The new system will touch just about every family in the U.S. — after all, a home is most people's biggest monthly expense and owners' largest financial asset — and affect millions of American jobs.
In other words, it's important that we get the details right.
One of the most contentious issues on the table — and a key sticking point between the two bills — is whether the federal government should guarantee certain types of mortgage debt against catastrophic risk. The Senate bill, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., establishes a limited guarantee on qualifying mortgage-backed securities that support both homeownership and rental homes, to be paid for by the issuers of the securities. The House bill, which recently passed the House Financial Services Committee, eliminates any government guarantee on most home loans and almost entirely privatizes the U.S. mortgage market, making it less stable.
Eliminating the government guarantee would establish a profoundly different system of housing finance than we're used to and not for the better. According to Moody's Analytics, mortgage interest rates would skyrocket (up roughly 20% from their current level), the 30-year fixed-rate mortgage would be much harder to find (from 75% of the market down to as little as 10%) and the housing finance system would be more vulnerable to investor runs and boom-and-bust cycles.
The impact would not be limited to homeowners. For the more than one-third of American households who rent their homes — families with a median income of less than $31,000 a year — housing costs are predicted to rise by as much as 2%, as the total supply and value of rental homes would fall significantly, according to recent analysis from Freddie Mac. These are not the outcomes we should be striving for in mortgage market reform.
As we march ahead on reform, the Corker-Warner legislation at least starts us off on the right foot. The bill takes many of the necessary steps to establish a housing finance system that works for all American families, one that promotes liquidity, stability, affordability and access, with support for both homeowners and renters.
That said, the bill is far from perfect. It needs to do more to ensure a liquid and affordable market for multifamily mortgages, acknowledging the critical role Fannie and Freddie play in the rental market today. It needs specific rules that mandate affordability and protect creditworthy but historically underserved families, including low-wealth families, minority borrowers, rural families and families that live in small apartment buildings. And it needs additional protections for struggling homeowners, ensuring that investors in government-backed mortgages keep borrowers in their homes whenever possible.
We're looking forward to a fruitful debate on the future of Fannie Mae and Freddie Mac in the coming months. As we weigh our options, it's important that we consider the real-world impact of our decisions on working families and communities — who will be able to get a mortgage, what kind of terms they'll face and what kind of conditions we'll see in the rental market. After all, that's who the housing finance system is supposed to serve.
Alazne Solis is the senior vice president and public policy and corporate affairs executive at Enterprise Community Partners.