Fannie Mae and Freddie Mac shares are falling like a rock. The Bush Administration is said to be working on a plan to place the two “quasi-governmental government sponsored enterprises” (GSEs) into a public conservatorship.
What does this mean for affordable housing?
- If the government explicitly guarantees the obligations of the GSEs it will add $5 trillion to the existing $9 trillion in national debt. This in turn will drive up the government’s cost of borrowing and that will mean cutbacks in spending for government programs – like low income housing.
- A shaken secondary housing market will likely mean that credit underwriting will be further tightened, drying up loans for all but the lowest risk home buyers.
- Interest rates could conceivably go either way. I think this could result in higher home interest rates as investors demand higher interest rates to offset perceived greater risks because of the perceived vulnerability of the GSEs. Bit interest rates could go the other way if the government formally guarantees the GSE obligations then these mortgages would be perceived as an even safer investment.
- We can kiss the funding source for the National Housing Trust Fund goodbye. Congress was moving rapidly to fund the trust fund we have all worked so long and hard for out of Fannie and Freddie surpluses. Those will be thrown back into shoring up the GSEs or will be pocketed by the government to offset the huge costs of taking over their obligations.
- Low income Housing Tax Credits will bring less in the market and loans for LIHTC debt will be harder to get. The GSEs have been investors and lenders in affordable rental housing.
To summarize a collapse of the GSEs will mean:
- less federal spending on low-income housing;
- fewer lower income families able to qualify for a home loan;
- probably high home mortgage rates;
- no National Housing Trust Fund to address the housing needs of the most needy; and
- fewer rental housing units being built under the Low Income Housing Tax Credit program.
Not good news.
But, on the other hand, this might at long last cause a fundimental review and restructuring of the housing finance system. It is not like the current has well served the interests of lower income Americans. So the next Congress and the next Administration may have an opportunity to more equitably treat lower income folks through this expensive shakeup.