As the Senate Banking Committee turns its attention to reform the nation’s secondary mortgage market, civil rights leaders recently spoke in a strong and united voice. For these national organizations, the housing finance system must embrace — not abandon — its obligation to provide broad access and affordability in mortgage lending.
In a June 6 letter to Committee Chairman Mike Crapo (R-Idaho) and ranking member Sherrod Brown (D-Ohio), the senators were advised that any emerging legislation for the secondary housing finance market must set in place guidelines to protect against unlawful discrimination. A second and equally important requirement is for all credit-worthy borrowers have access to the mortgage credit they deserve.
Signing the letter was a broad coalition of activists: The Leadership Conference on Civil and Human Rights, NAACP, National Urban League, National Council of La Raza, National Coalition for Asian Pacific American Community Development, National Fair Housing Alliance, National Community Reinvestment Coalition and the Center for Responsible Lending (CRL).
“Any reform of the secondary mortgage market must ensure access and affordability to mortgage credit for all creditworthy potential homebuyers in all regions of the nation,” the letter stated. “Diminishing the role and importance that the secondary housing finance systems plays in achieving this goal will continue to deepen the racial wealth gap that already exists in America today.”
The current public policy debate on the secondary mortgage market has its roots in the foreclosure crisis that began in 2007. Lax federal regulation and excessive risk-taking by Wall Street firms led to a housing boom where investors chased profits on unsustainable mortgage loans. Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), followed that market trend, hoping to capture profits for their investors. This led to them facing losses that resulted in their being placed into conservatorship by the federal government.
Like many other private firms, the GSEs received a financial bailout from the U.S. Treasury Department to avoid a complete market meltdown. Eventually and as authorized by Congress in the Troubled Asset Relief Program, or TARP, $698 billion in rescue funds were allocated for the GSEs, including a $187 billion taxpayer investment. Even today, the GSEs remain under conservatorship.
But with the housing market stabilized, multiple calls have urged legislative reform of Fannie and Freddie, despite some reforms already enacted.
For communities of color, the next decade is projected to demographically change to majority minority. According to the Joint Center for Housing Studies at Harvard, seven out of every 10 new households formed will be families of color. In addition, the future of Fannie Mae and Freddie Mac is tied to several statutory mandates that include requirements for the GSEs to share responsibility in reaching affordable housing goals, as well as access to credit that is free from discrimination.
In a broad sense, today’s public policy housing debate is also an opportunity to learn from the mistakes of the past and craft new policies that will avoid their recurrence.
“The nation’s housing finance system has never worked for people of color,” noted Lisa Rice, executive vice president of the National Fair Housing Alliance. “The system was originally and purposefully designed to exclude these consumers. That construct infused barriers to equal access into the system and those barriers have never been unwound.
“As a result people of color face grave difficulties when trying to access credit,” Rice said. “This means that the Affordable Housing Goals must be strengthened and the resources and resolve to achieve them must be set in place.”
Vanita Gupta, president and CEO of the Leadership Conference on Civil and Human Rights, said Fannie Mae and Freddie Mac’s special relationship with the federal government means the mortgage financiers have “special responsibilities to the public as well.”
“Most importantly, part of their business has to be based in low-income communities that have historically been underserved,” Gupta said. “If Congress decides to overhaul the housing finance system, any entities that take the place of Fannie and Freddie and enjoy the same protections must also meet the same responsibilities.”
As the housing market continues to grapple with historical discrimination that resulted in persistent and growing racial wealth gaps, it must also adapt to new 21st Century challenges as well. Many millennials are shunning or delaying homeownership due to heavy student debt. Future policies must find a way to serve a diverse marketplace and protect taxpayers from more financial bailouts.
Among remedies offered for thoughtful debate and action include:
1. Enforce the GSEs obligations that guarantee sustainable access to credit and affordable housing — especially for low-to-moderate income consumers living in underserved communities. These are the same consumers who have been left out of the nation’s financial recovery.
2. Authorize the recapitalization of both Fannie Mae and Freddie Mac with guidelines that allow a reasonable economic return.
3. Curb the practice of added costs to mortgage loan originations, fees that add costs to the mortgage origination costs known as loan level price adjustments or LLPAs. These fees lock out 5.2 million potential borrowers due to unnecessarily tight credit restrictions.
4. Fully fund HUD’s Housing Trust Fund.
“Access and affordability are central tenants of the nation’s housing finance system. Two others are safety and soundness,” said Nikitra Bailey, CRL Executive Vice President. “Any GSE reform must protect affordable housing goals and advance the GSEs’ duty to serve. All credit-worthy consumer in every region of the nation should have a real opportunity to pursue their homeownership dreams.
Charlene Crowell is the communications deputy director with the Center for Responsible Lending. She can be reached at Charlene.firstname.lastname@example.org.