Congress should consider legislation for the future federal role of the government-sponsored enterprises (GSEs) in housing finance that addresses their structure and establishes clear, specific, and prioritized goals, as well as considering all relevant entities, the congressional watchdog said in a report issued Friday.
The Government Accountability Office (GAO) said in its report that the legislation should include GSEs Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—both of which purchase and securitize mortgages into mortgage-backed securities (MBS) – as well as the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae).
FHA insures about 25% of mortgage originations, and Ginnie Mae (a federally owned corporation) guarantees MBS backed by federally insured mortgages, the GAO noted. The GSEs, along with Ginnie Mae, have issued or guaranteed 95% or more of all MBS issued annually since 2008, GAO said.
“Recent market trends pose risks to these entities and the housing finance system,” the congressional watchdog said in its findings. “For example, mortgage lending standards have loosened slightly in recent years, which could increase the risk of borrower default—especially in a recession or downturn in the housing market—and losses to federal entities. Nonbanks have increased their presence in mortgage lending and servicing, which involves collecting monthly mortgage payments, among other duties.”
The agency said that, for instance, the share of nonbank originations of FHA-insured mortgages increased from 56% in fiscal year 2010 to 86% in 2017. The share of nonbank servicers of mortgages in enterprise MBS also grew from 25% in 2014 to 38% as of the third quarter of 2018, according to the report. “While nonbank lenders and servicers have helped provide access to mortgage credit, they are not subject to federal safety and soundness regulations,” GAO said.
The congressional watchdog said Congress and industry stakeholders have introduced a number of proposals to reform the housing finance system, including addressing the prolonged conservatorship of the enterprises. “But several proposals lack clearly defined and prioritized goals or do not consider all relevant federal entities in the housing finance system,” the report stated.
The report stated that if Congress incorporated the key elements outlined in the report in future reform efforts, it could facilitate a more focused and comprehensive transition to a new housing finance system. “Moreover, reform efforts that are both focused and comprehensive could allow market participants to confidently engage in long-term planning and help increase private-sector participation in the markets,” GAO said.
The regulator of the GSEs, the Federal Housing Finance Agency (FHFA) is currently without a permanent director. Comptroller of the Currency Joseph Otting is serving double-duty now as both comptroller and as acting director of FHFA. However, President Donald Trump has nominated Mark A. Calabria to be the permanent directo.. If confirmed, Calabria would serve a five-year term (succeeding former Rep. Mel Watt, whose term as FHFA director ran out Jan. 6, according to the White House).