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Ten years after, what have we learned?

5 min read

On September 6, 2008, the federal government nationalized Fannie Mae and Freddie Mac, a measure without precedent in global financial history, even more systemically dramatic than Pierpont Morgan’s single-handedly underwriting global liquidity to stop the Panic of 1907. That action wiped out the GSE’s shareholders’ equity, though mindful of the litigation threat the takeover’s architects carefully used the anodyne term ‘conservatorship.’

Now the foreclosure crisis has been worked off; financial institutions that took their mandatory TARP medicine have largely repaid it; the economy and capital markets are humming; the Great Recession a receding memory. Yet the GSEs’ conservatorship improbably survives, under the watchful eyes of nanny FHFA, an institution created barely two months before being pressed into service.

Ten years after a desperate leap into the unknown, what have we learned that’s relevant today?

The LIHTC market didn’t need the GSEs. Despite the instant vaporization of 40 percent of Low Income Housing Tax Credit equity volume, the financial sector’s addiction to CRA investment credit overcame its investment anxiety, and within roughly a year LIHTC pricing was stable and continuous from coast-to-coast. Though the Exchange’s 85 cents nationwide price support buttressed some less-robust properties, by the time Section 1602 expired, few mourned its passing.

GSE multifamily was an innocent bystander caught in the single-family crossfire. While both GSEs’ single-family portfolios got very sick – Fannie Mae’s single-family serious delinquency rate (SDR) crested above 5.2 percent (2010, Q1) and more-cautious Freddie Mac’s at 4.1 percent –multifamily SDRs never reached even 1/5 of those levels, and GSE multifamily made money every quarter. Today, Fannie Mae’s SDR is 0.13 percent, Freddie’s even lower.

All that systemic risk? Never actually cost the government a thing. Treasury’s $187 billion capital injection into Fannie and Freddie was repaid in 2012, and by virtue of its direct ownership, the U.S. government has reaped a $91 billion profit, a 50 percent return over eight years.

GSE-fueled liquidity was and is critical to America’s homeownership affordability. The GSEs handle 95 percent of all mortgage-backed securities (MBS) issuance nationwide. One out of every two new Fannie/Freddie single-family loans goes to a first-time homebuyer; for FHA, it’s five out of every six.

The government has discreetly and painlessly de-risked from the GSEs’ pre-crunch reckless exploitation of moral hazard. Under their respective pre-takeover CEOs, the two GSEs were cynically “privatizing the gains and socializing the losses,” as my friend and longtime GSE watchdog Shekar Narasimhan has said. Exploiting their implicit Federal guarantee, they lent long and borrowed short, arbitraging the yield curve and massively expanding their balance sheets, to a bloated $800 billion (Fannie) and $850 billion (Freddie).

As conservator, FHFA ordered both on a balance-sheet diet, requiring each new issuance to be funded with matched-term securities. Over the ensuing years, both balance sheets steadily shrank, and today each is 70 percent smaller, under FHFA’s mandatory $250 billion cap, an astonishing gradual withdrawal with negligible side effects.

America had ‘too much’ homeownership. Under Frank Raines and his mentor/predecessor Jim Johnson, Fannie Mae touted ever-rising homeownership, not just the American Dream but also immune to pricing bubbles. By 2005, amid the GSEs’ go-go securitization of Alt-A and subprime loans in a foolish attempt to buy market share, our homeownership rate topped 70 percent; when the bubble burst, and several million households were put through the foreclosure meat grinder, draining their savings and bludgeoning their credit rating. Today, home ownership is at 64 percent, a much better set point.

It’s harder to get a homeownership loan than before… but is that bad? In 2007, average FICO scores of approved applicants were 700; by 2018, they’re up five percent, to 735. Variable-rate loans, often favored to stretch incomes into more-expensive homes, are back down under five percent of all originations. Addictive and teaser concessionary rates/payment structures are non-existent. Overall, fewer people who buy homes are taking on risks they don’t understand, can’t control and can’t hedge.

However much china was broken, the conservatorship coup worked. Not working would have been globally catastrophic. The U.S. homeownership stock is worth $26.4 trillion, with $15.7 trillion of aggregate home equity that not only has been protected, it is once again reliably liquid.

Rental is the new urban priority. With the Millennial generation consumed by its $1.5 trillion of uneconomic student debt and as such largely out of the homebuying market, urban rents are outpacing inflation and rent burdens generally rising across the board. Supply is not keeping up, and the tweaks to LIHTC scarcely move the production needle.

The federal government has exited the business of housing policy leadership. Having burned its political hands on housing, administrations and congresses alike have done no more than give the occasional speech, publish the occasional, largely ignored, position paper or introduce dead-on-arrival reform legislation.

Now it’s the cities’ turn. States, and especially growing metropolitan areas, left to their own political and policy devices, are thinking for themselves. This is painless, hesitant…and exciting.

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at dsmith@affordablehousinginstitute.org.