Housing Finance Recommendations

Background: In 2013, out of 1,622,000 conventional purchase mortgage loans, African Americans got
only 36,903 loans and Hispanics got 71,013 loans. This represents 2.2% and 4.3% of loans respectively,
compared to these two groups being only 13.2% and 17.1% of the U.S. population. This mortgage
availability crisis is not expected to improve in 2014 and 2015. (Source: Center for Responsible Lending
Policy Brief, September 2014, based on HMDA data.)
High-Level Asks:

Support families by setting strong housing goals, completing the Duty to Serve rulemaking, and
moving forward with reforms in other areas such as servicing, loss mitigation, and REO properties.

Lock in and enhance permanent funding for the Housing Trust Fund and the Capital Magnet Fund by
restoring Fannie and Freddies safety and soundness.

Re-build capital at Fannie Mae and Freddie Mac by allowing them to keep their profits and raise
additional capital to support their affordable housing mandates, secondary market function, and
further expansion of the underwriting credit box to benefit all Americans.

Discussion
Before the end of the Obama Administration, there is a unique opportunity to help disadvantaged
communities and to build a lasting legacy of affordable housing. This can be done by providing a true
helping hand to those who have an uphill battle accessing the American dream of home ownership.
Permanent funding of the Housing Trust Fund and Capital Magnet Fund can be achieved, without any
further action or appropriation by Congress, by ensuring the continued existence and recapitalization of
Fannie Mae and Freddie Mac. Ensuring the GSEs safety and soundness would allow them to continue
their mandated affordable housing goals. Maintaining these goals has been, and will continue to be,
crucial to supporting social stability, social mobility, and economic growth. The GSEs current undercapitalized state jeopardizes long-term housing access to significant portions of the U.S. population, those
unable to access private credit due to tighter lending standards.
The use of the word recapitalization is in no way meant to suggest that Fannie Mae and Freddie Mac will
(or should) go back to their prior positions of market dominance and taxpayer risk. Building capital inside
the enterprises not only protects taxpayers, but actually expands options for future reforms.

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1.
Regulatory and structural issues:
Oversight of the mortgage sector by the CFPB, FHA, FHFA, and other regulatory bodies has reduced the
predatory lending and foreclosure practices of the past that have painfully impacted urban communities
and constituencies. However, the credit box remains unnecessarily tight, and significant issues remain
with the servicing and disposition of troubled mortgages. To address this, we need regulatory changes that
make it easier for mortgage credit to flow to underserved home buyers and that strengthen the
neighborhoods in which they live. For example:
A.
FHFA should release a strong housing goals rule and should complete the longoverdue duty to serve rulemaking. FHFA has not yet issued a final rule setting strong
housing goals for Fannie Mae and Freddie Mac, and it should do so immediately. It should set
strong single- and multi-family benchmarks, including a 27% goal for low-income home
purchase lending, take enforcement actions that consider the performance of the overall market
when the GSEs fail to meet housing goals, establish sub-goals for small multifamily properties,
and create reporting requirements for single-family rentals. In addition, the HERA statute requires
FHFA to promulgate a duty-to-serve rule to encourage responsible innovation and give the GSEs
strong incentives to serve broadly and lead the market. We need Fannie and Freddie to provide
new mortgage products, flexible underwriting, affirmative outreach, and other activities including
grants to and partnerships with high-performing nonprofits in the housing space.
B.
FHFA should direct the GSEs to update their credit score models to include more
creditworthy borrowers. Currently, Fannie Mae and Freddie Mac require the use of a FICO 04
credit score in their automated underwriting systems. However, newer scoring models, such as
VantageScore, have made critical changes that improve the reliability of the resulting scores
and/or allow the scoring of the 30 to 35 million consumers that could never get a credit score
under the FICO 04 system because of their limited credit history or thin files. Proposed newer
scoring models no longer consider paid collection items, including medical debt collections, and
give less weight to unpaid medical debts. FHFA should direct the GSEs to modernize their
underwriting systems and to permit use of scores resulting from these new models.
C.
FHFA should work with the GSEs to institute other reforms aimed at keeping
borrowers in their homes, and at preserving neighborhoods when foreclosure is the only
option. For years, The Leadership Conference and other groups have called for the use of
principal reduction and other key loss mitigation reforms. Only some of these reforms have been
put into place. Meanwhile, Fannie and Freddie have a significant number of REO properties
under their control that must be managed properly and put back on the market in a way that
fosters neighborhood stability. In many instances, however, this is not happening as evidenced
by the fact that recently, the National Fair Housing Alliance filed a complaint against Fannie Mae

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for maintaining foreclosed properties in minority neighborhoods more poorly than in white
neighborhoods. Last year, we presented a detailed set of recommendations (attached) to the
FHFA calling for reforms to policies that govern access & affordability, servicing, nonperforming loans, REO disposition, and other key issues. It will be important to discuss these
areas in greater depth as we move forward.
2.
Restructuring GSEs in and after conservatorship to enhance financial resources available
for affordable housing:
On the subject of financial resources put towards greater mortgage availability, we need these funds more
secure, we need them faster, and we need more of them. To make progress on each of these goals, we can
and should recapitalize Fannie Mae and Freddie Mac and use that process to generate and improve the
quality of these financial resources.
To map out this process, FHFA should figure out exactly how to recapitalize Fannie Mae and Freddie
Mac, either internally or by hiring a well-qualified advisor. Once the recapitalization process starts, it will
be effectively irreversible by future administrations. The immigration issue illustrates why just as a
decision by the Obama Administration to let people stay in the United States will not be changed by a
new president who would have to confront the horrible political optics of making these people leave, a
decision by the Obama Administration to support safety and soundness would not be reversed except by a
new president who wants to be seen as supporting recklessness and risk to taxpayers.
The recapitalization process can deliver major financial benefits to low-income and minority communities
by securing financial resources and adding new ones to support affordable housing.
A.
Regular contributions to affordable housing funds by Fannie Mae and Freddie Mac.
At the Financial Services Committee hearing with Director Watt on January 27, 2015, House
Republicans argued that FHFAs decision to turn on the GSEs contributions to the Housing
Trust Fund and the Capital Magnet Fund is on uncertain legal ground so long as the GSEs are
undercapitalized. Section 1131(b) of HERA says that FHFA shall temporarily suspend
allocations by an enterprise upon a finding that such allocations (1) are contributing, or
would contribute, to the financial instability of the enterprise; (2) are causing, or would cause,
the enterprise to be classified as undercapitalized; or (3) are preventing, or would prevent, the
enterprise from successfully completing a capital restoration plan. We believe Director Watts
interpretation of this provision is sound, but it will remain especially contentious under the
current status of the GSEs.
When Fannie Mae and Freddie Mac lose money during a quarter and this will happen
eventually over the housing cycle given their complex financial accounting the enterprises lack

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of capital to absorb those losses will lead them to draw on the Treasury financing lines once
again. The timing of a draw on Treasury may be in question, but the likelihood of this happening
is not. If this occurs during this Administration, that will lead to political attacks on the White
House for having promised no more bail-outs. Regardless of the timing of a draw, Republicans
will use the opportunity to call for, and to try to force, suspension of affordable housing funding
by the GSEs making a draw. Our communities will be at risk from this eventuality, so Fannie and
Freddie should be allowed to rebuild capital to protect both our people and the Administration.
The GSEs contributions to affordable housing can produce roughly $300-400 million per year,
but this flow of funds must be secured against political interference during and beyond this
Administration. Future administrations may not be as sympathetic as this one to the need to
maintain this important source of funding for affordable housing.
B.
Affordable housing contributions from GSE shareholders as part of the
recapitalization process. Private parties can do things that are not within the legal or fiscal
power of the government, as we saw earlier in this Administration in bank settlements over
mortgages and mortgage-backed-securities. As part of settling lawsuits with the Department of
Justice, major banks agreed to provide mortgage relief and make contributions to affordable
housing funds benefiting constituencies in serious need of help.
Similarly, as part of recapitalizing Fannie Mae and Freddie Mac, the Administration has to deal
with the litigation between private GSE shareholders and the Treasury Department which has
claimed virtually all the enterprises earnings through a net worth sweep. In exchange for
recognizing the private GSE shareholders claims and allowing them to recover value, the
Administration could require shareholders to contribute a portion of their securities to the
Housing Trust Fund, the Capital Magnet Fund, or other affordable housing efforts. We believe a
settlement could be reached in a way that (a) would involve no payment to shareholders or
harmful admissions by the government, (b) could deliver substantial value to communities in
need of support, and (c) could be structured, packaged and announced in a way that makes it a
political win for this Administration rather than a problem left for the next one.
Across both GSEs, there is roughly $33 billion face value of preferred stock outstanding and tens
to hundreds of billions of dollars of potential value to common stock. The Administration should
consider asking the holders of that stock to support the GSEs public mission by contributing
some of that value to affordable housing efforts as part of recapitalization. Such one-time
contributions could dwarf annual contributions from Fannie Mae and Freddie Mac.

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C.
Contribution of Treasurys warrants for common stock of Fannie Mae and Freddie
Mac to the affordable housing funds. Often lost in public discussion of the GSE
conservatorships is the fact that the Treasury Department currently owns warrants for 79.9% of
the common stock of each of Fannie Mae and Freddie Mac. While it may not be widely
appreciated, these warrants are extremely valuable. In recapitalizing the GSEs, the government
should maximize the warrant value and use that value in support of affordable housing.
The value of the warrants could easily exceed $100 billion. If the Administration were to
contribute a portion or all of these warrants to affordable housing, that would ensure funding of
necessary assistance to our communities for a generation. It is important to note, however, that
this value is only achievable to the extent that a recapitalization allows value to flow over time to
the Fannie and Freddie common stock to which these warrants are tied. The warrants cannot
easily be sold in the market, or exercised with the common stock received then sold in the market,
before the end of this Administration. But the Administration can keep this value in the housing
sector and devote its use to constituencies that need help. The huge amount of value in the
warrants can make this a top 10 or even top 5 legacy item for President Obama. Of course,
future administrations may not have the same priorities, and they may use this substantial longterm value for other purposes, unless it is contributed to the trusts.
D.
In conservatorship, FHFA should continue its work to de-risk the GSEs so they
need less capital to achieve safety and soundness. Keeping Fannie Mae and Freddie Mac safe
and sound ensures the flow of affordable funds through their direct contributions to the trust
funds and through their securities. FHFA should continue de-risking the GSEs by reducing risk
away from the balance sheets and to mortgage insurers and capital market investors. HERA has
already mandated the near-total elimination of the GSEs portfolios for other than liquidity
purposes. Whatever operational reforms are enacted should be matched by full exercise of the
safety-and-soundness regulatory power that HERA gave FHFA as regulator. That statute is not
just about conservatorship, it is about systemic stabilization.
E.
Post-conservatorship: after sufficient capital is raised and safety and soundness are
ensured, a portion of Fannie and Freddie economic returns should be recycled back into
affordable housing. While the two largest financial institutions in the United States need to be
strongly regulated for safety and soundness, and dividends may be necessary to attract private
capital into the GSEs and lessen their dependence on the Treasury Department, all profits above
capped rates of return being required to be contributed to affordable housing will both ensure
long-term assistance to communities in need and deprive the GSEs of the deep pockets with
which to lobby legislators, avoiding much of the basis for regulatory capture.

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Fannie Mae and Freddie Mac are as essential to the mortgage market as water and power companies are
to daily life across the United States, and the GSEs could similarly be regulated going forward as public
utilities. While FHFA as conservator can regulate Fannie and Freddies guarantee fees while they are in
conservatorship, after the conservatorship is over a public utility commission could be responsible for
determining allowable rates of return. This particular item will likely require legislation, which could
address any additional problems with the charters.
Political benefits to the Administration

Secures the existing affordable housing benefits provided by Fannie Mae and Freddie Mac for
future generations, preventing their elimination or inadequate replacement by Republicans.
Maintains and builds this Administrations legacy with low-income and minority communities as
the champion of their economic interests on the housing front.
By unlocking and channeling financial resources to affordable housing, ensures millions of
Americans will be able to buy homes for decades beyond this Administration.
Protects taxpayers against future GSE draws against the Treasury Department by putting
substantial private capital in the first-loss position.
Completes financial sector reform (clean-up after 2008 financial crisis) begun with Dodd-Frank
and continued with mortgage regulations protecting homeowners, by acting on the last item of
unfinished business Fannie and Freddie reform.

Almost all of this can be done without further legislation from Congress.
None of this takes away from Congress ability to pass housing finance reform in the future or to fix any
problems with the charters of Fannie Mae and Freddie Mac. In fact, the more capital there is in the GSEs,
and with reforms including (but not limited to) those described above, the more likely it is that future
Administrations and Congresses will have to carry out reform in ways that are supportive of and
responsive to the interests of the Presidents base.