In a recent comment letter submitted concerning the Biden administration’s proposal to allow Freddie Mac to purchase second mortgages, it was pointed out that the proposal fails to address safety and soundness, a legal requirement outlined in the Housing and Economic Recovery Act of 2008. Despite this technical flaw, the proposal is criticized for being poor housing finance policy that will not increase home ownership or affordability, but rather increase debt levels and put upward pressure on prices.
Over the last few decades, federal housing finance policies, including the proposed Freddie Mac second mortgage purchase, have done little to make housing more affordable or increase home ownership. The federal government has played an increasingly dominant role in housing finance, with the combined share of Fannie Mae and Freddie Mac reaching 47 percent of outstanding residential mortgage debt by 2010. Additionally, the Federal Housing Administration insured 16 percent of the single family mortgage market in 2023, bringing the federal share to 63 percent.
The dominance of federal entities like Fannie Mae, Freddie Mac, and Ginnie Mae in the secondary mortgage market has stifled the presence of privately issued mortgage-backed securities. This violates the original intentions of Congress in establishing Fannie and Freddie, as they were not meant to dominate the market. Despite requirements in their charters to prevent excessive use of their facilities, there has been little enforcement by the FHFA, allowing for expanded purchasing authority for Freddie Mac and further increasing federal dominance in the mortgage market.
The new proposal explicitly allows Freddie Mac to purchase more mortgages, with the primary goal being to provide borrowers with a lower-cost alternative to cash-out refinancing in higher interest rate environments. This aims to help homeowners take on more debt, beyond what they need to purchase a home, which raises concerns about the impact on homeowners and the overall financial system. The proposal should be disqualified on the basis of its potential risks and lack of focus on increasing homeownership.
It is noted that the current administration’s focus on housing affordability through subsidies may not be the most effective approach, as housing supply constraints and affordability issues are often best addressed at the state and local levels. Federal policymakers are urged to reduce federal subsidies and enforce provisions in GSEs’ charters to improve housing affordability. Limiting GSEs to purchasing only primary mortgages for owner-occupied homes is suggested as a potential reform to address the challenges in the housing finance market and improve affordability for homeowners.
