FHFA Issues Final Rule Expanding Fannie and Freddie’s Role in Underserved Markets

The Federal Housing Finance Agency (FHFA) issued a final rule on Tuesday creating a “duty to serve” for Fannie Mae and Freddie Mac to serve very low to moderate-income American families in three underserved markets including manufactured housing, affordable housing preservation, and rural housing.

As Heritage Foundation scholars Norbert Michel and John Ligon describe it, “the ‘duty to serve’ is a nebulous concept that codified the idea that the GSEs (and lenders) have a ‘duty’ to provide mortgage financing to the entire market. Thus mortgage market participants would no longer have to make sure a certain percentage of their business serves a low-income segment, but they would have to fulfill their duty to serve that segment.”

Essentially, Government Sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac – will have to adequately service low-income individuals looking to buy a home in specific housing markets as determined by federal bureaucrats at the FHFA. In fact, under the final rule, “Fannie Mae and Freddie Mac will each submit to FHFA a three-year Underserved Markets Plan that describes the activities and objectives they will undertake to meet their Duty to Serve requirements.” The last thing Fannie and Freddie should be doing right now before a new President assumes office is expand their footprint in the housing market.

Misguided affordable housing goals encouraged by multiple Presidents and carried out by GSEs and the Federal Housing Administration (FHA) were a large cause of the housing bubble and subsequent collapse in 2008-09. In the run-up to the housing crash, Fannie and Freddie went from holding 5 percent of the nation’s mortgages to over 20 percent and held nearly $8 trillion in debt. Fannie and Freddie helped destabilize the housing market by buying risking mortgages and were eventually bailed out by U.S. taxpayers to the tune of $200 billion.

President-elect Trump and recently nominated Secretary of the Treasury, Steven Mnuchin, should work with Congress to shut down Fannie and Freddie, not expand their power over the housing market. Removing GSEs from the marketplace will allow private institutions to return to the secondary mortgage market and expand the capital available for mortgage lending through healthy competition.

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