Fannie, Freddie could fix what ails VA, FHA lending
Most high-performing companies have invested heavily in technology over the last decade — and Fannie Mae and Freddie Mac are good examples. They’ve both made huge investments in innovation while returning nearly $280 billion to taxpayers following the 2008 bailout. With the future of Fannie and Freddie still unclear, we must realize the value contained in these two enterprises and use them to make the rest of the federal government’s mortgage market activities safer, more efficient and more transparent.
Fannie and Freddie have built a common securitization platform to issue their bonds that is the very best in the world. This efficiency lowers the cost of mortgage credit to the American homeowner. They’ve also built a market to sell mortgage credit risk to private investors efficiently, transparently, and on a massive scale. Fannie and Freddie are not building up balance sheets with huge credit risk like they used to, but rather, they are now selling significant portions of that risk to private investors and using their scale and technology to keep mortgage rates low.
Unfortunately, the systems, efficiency, and know-how that propel Fannie and Freddie every day do not extend to the federal government’s entire housing finance footprint. The Department of Housing and Urban Development, Federal Housing Administration, Department of Agriculture and Department of Veterans Affairs all have major mortgage finance programs that are not technologically savvy, are not efficient and leave 100% of the credit risk with the U.S. taxpayer. The lending done by FHA, USDA and VA is extremely important to our country, particularly veterans, people living in rural areas, and lower- and moderate-income families. Yet there is no reason this lending should be done inefficiently and where the taxpayer takes 100% of the risk.
For example, Walker & Dunlop has tremendous scale, being the #1 Fannie Mae lender, #3 Freddie Mac lender, and #3 HUD lender based on firm commitments, in the last fiscal year. Yet over the past two years, the average processing time from a borrower signing a loan application to closing the loan was 61 days for Fannie Mae, 75 days for Freddie Mac, and 352 days for HUD. This dramatically different timetable is a result of the systems, processes, and technology that the government-sponsored enterprises have implemented.
In 2007, the FHA, the USDA and the VA insured or guaranteed $99 billion of loans for single-family and multifamily borrowers across the United States. When the financial crisis hit, and private capital fled, these three government lending programs stepped in, increasing their lending volume to $293 billion in 2011. This is exactly the role the federal government and its “countercyclical” capital should play. Yet as the economy has recovered, and private capital has returned, these three agencies have maintained their elevated market presence. Most strikingly, the FHA guaranteed $226 billion of single-family loans in 2017.
Starting with the appointment of a new Federal Housing Finance Agency director in 2019, the Trump administration should look to leverage the scale, efficiency and transparency of Fannie and Freddie and move much of the subsidized lending that the federal government guarantees through FHA, USDA and the VA into Fannie and Freddie. This shift would reduce the government’s costs, would allow for these important programs to be managed in a far more efficient manner, and would allow Fannie and Freddie to use their broad market reach and transparency to bring private capital to the parts of the housing finance system that currently sit in the depths of the federal government — driving down the cost of credit and reducing taxpayer risk.