NAHB Says Federal Government Needs to Play Central Role in New Housing Finance System

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As Congress begins to debate how to reform government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, the National Association of Home Builders (NAHB) called on lawmakers this week to ensure that the federal government continues to provide a backstop for the housing finance system to ensure a reliable and adequate flow of affordable housing credit.

Testifying before the House Financial Services Committee, NAHB Third Vice Chairman Rick Judson, a builder and developer from Charlotte, N.C., said the need for such support is underscored by the current state of affairs, with the GSEs, Federal Housing Administration and Ginnie Mae acting as the primary conduits for residential mortgage credit.

"NAHB feels the federal backstop must be a permanent fixture in order to ensure a consistent supply of mortgage liquidity as well as to allow rapid and effective responses to market dislocations and crises," said Judson.

Regarding the future of Fannie Mae and Freddie Mac, NAHB recommended the following policy changes in terms of structure and operations to restore and improve the secondary mortgage market and housing finance system:

• Degree and structure of government support. While government support is needed to ensure that mortgage credit is available and affordable in all areas of the country under all economic circumstances, for the conforming conventional portion of the mortgage market, that support should not be provided directly to private companies. Rather, the federal government should provide an explicit guarantee of the timely payment of principal and interest on securities backed by conforming conventional mortgages, in the same manner that Ginnie Mae now provides guarantees for investors in securities representing interests in government-backed mortgages.

• Operation of the conforming conventional mortgage market. NAHB envisions that private companies, called conforming mortgage conduits (CMCs), would be chartered to purchase conforming conventional loans that are originated by approved mortgage lending institutions such as banks, savings and loan associations, mortgage banking companies and credit unions. CMCs would issue securities backed by those mortgages, which would carry a federal government guarantee of the timely payment of principal and interest for the securities investors.

• CMCs would guarantee the timely payment on the mortgages that are pooled in the government-guaranteed securities and would be required to be well-capitalized and to maintain reserves at levels appropriate for their risk exposure. However, CMCs and the mortgages backing their securities would not have implicit or explicit support from the federal government. A fund would be established by the government to provide a guarantee of timely payment of principal and interest to investors in the securities. CMCs benefitting from the federal securities guarantees would pay a fee to capitalize the fund, which would be designed to mitigate the federal government's risk so that it would only be exposed in the case of a "catastrophic" occurrence.

• Conforming conventional mortgages.  Mortgages eligible for inclusion in securities receiving an explicit federal guarantee should be products with well-understood risk characteristics -- such as fixed-rate mortgages, standard adjustable-rate mortgages and selected multifamily mortgage loans.

NAHB is in the process of updating its policy on the future of the Federal Home Loan Bank System and believes that policymakers must account for their significant structural and operational differences from Fannie Mae and Freddie Mac when considering the future make-up of the housing finance system.

With Fannie Mae and Freddie Mac now operating under conservatorship and experiencing severe financial pressures, NAHB urged Congress to proceed with caution as lawmakers take steps to transition to a new housing finance system.

"Any changes should be undertaken with extreme care and with sufficient time to ensure that U.S. home buyers and renters are not placed in harm's way and that the mortgage funding and delivery system operates efficiently and effectively as the old system is abandoned and a new system is put in place," said Judson.

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