Biden's new dilemma: How to slash housing costs for low-income borrowers

Progressives worry that Biden will not be bold enough to change the course of the powerful agency that oversees Fannie Mae (Freddie Mac), the two companies responsible for half the $11 trillion U.S. home loan market. Top Democrats want Biden to immediately name a permanent leader. Sherrod Brown, the Senate Banking Chair, stated that this position is essential to the administration's goal of building an equitable economy.Jesse Van Tol CEO of the National Community Reinvestment Coalition (a housing advocacy organization) said that they knew this moment was coming. Why don't we have a nominee already?Biden faces a difficult choice because of the pressure from the left. The Democrats have pushed Fannie and Freddie for years to increase homeownership and close the racial wealth disparity. However, making mortgages more affordable and easier to access could increase default risks and make it more likely that companies will need another bailout. To prevent their failure in the subprime mortgage crash, Fannie and Freddie was taken by the government.Analysts in the industry also believe that cheaper mortgages will not solve the problem of the housing market. The reason why prices have soared is because there isn't enough supply to meet the demand.Isaac Boltansky (Policy Research Director at Compass Point), said that there are serious questions about the impact FHFA has on affordability when there is a shortage. What does it do to move the dial a little when there aren't enough homes?Fannie and Freddie are government-sponsored entities that are crucial to homeownership in America. They buy mortgages from lenders and bundle them with securities for investors. This ensures affordability and liquidity in the mortgage market.In September 2008, the Bush administration took over Fannie and Freddie. They had been loaded with subprime loans to protect them from failure during the housing crisis. Since then, they have been under government conservatorship. Congress has repeatedly failed to reform their operations, and tensions about housing affordability have created a political fault line.Trump's administration worked to reduce Fannie and Freddie's footprints and increase their capital buffers, so that they could be released privately and withstand another housing crash. Democrats opposed these efforts because they would increase mortgage costs for consumers. Biden could face opposition from Republicans if the regulator he chose reverses course to increase housing affordability.According to Sen. Pat Toomey, the top Republican in the Senate Banking Committee, reforms are needed in the housing finance system. I look forward working with the FHFA director in enacting legislation that addresses the problems of the housing finance structure, ends conservatorships and protects taxpayers from future bailouts.Senator Pat Toomey, a member of the Senate Finance Committee (Republican from Pennsylvania), questions Charles Rettig, Federal Internal Revenue Service Commissioner, during a hearing held on Capitol Hill on April 10, 2019. Chip Somodevilla/Getty ImagesBiden has suggested a raft home-affordability initiatives, but Fannie and Freddie control might be his best tool.David Dworkin (president and CEO of National Housing Conference) stated that the FHFA director is America's most important and consequential job in housing. There is no second.Dworkin and other housing advocates want FHFA for Fannie and Freddie more financial risk. This would allow taxpayer-backed government intervention in the name expanding mortgage access.Among their suggestions: Allowing Fannie and Freddie to buy mortgages with lower credit scores; allowing private lenders more loans; reducing fees; and increasing investment in multifamily rental properties.Advocates demand that FHFA immediately remove Trump-era restrictions on Fannie/Freddie's purchase of high-risk loans. These loans are characterized by low credit scores, high debt-to income or loan-to value ratios.Lenders could issue more loans if they were able to buy and guarantee more loans. This would allow lenders to extend credit to more low income borrowers with lower credit scores. Fannie and Freddie would pay the bill if the loan defaulted.Dworkin stated that companies have "almost zero measurable risk" in their business today. This includes borrowers with "extraordinarily good" credit scores, and very few first-time buyers who can afford low down payments.He said that their job is not to eliminate risk. It's risk management. They are there to increase liquidity in the mortgage markets.Biden had the chance to alter the direction of FHFA after the Supreme Court ruled the agency's leadership structure was illegal and that the president should be able to remove its director. Biden fired Mark Calabria (the then-Director of the FHFA), a libertarian economist who was nominated by Donald Trump. Calabria had been working to shrink Fannie and Freddie and make them independent private companies.Federal Housing Finance Agency Director Mark Calabria speaks during a Senate Banking Committee hearing on Housing Finance Reform: Next Steps, held on Capitol Hill on September 10, 2019, in Washington. Andrew Harnik/AP PhotoSandra Thompson was appointed acting director by the Biden administration. Thompson, who has been with FHFA since 2013, previously worked as a bank regulator for the Federal Deposit Insurance Corp. for 23 years. This agency oversees lenders' safety and soundness.Thompson stated that she was determined to ensure the FHFA housing finance system operates "in a safe, sound manner" and keep a laser-focused focus on community investment. Thompson stated that there was a wide gap in affordable housing and credit access, particularly in communities of color.Erika Poethig is the special assistant to President for Housing and Urban Policy. She stated that the administration is committed to increasing homeownership affordability, particularly for low-wealth borrowers, and for communities of color facing challenges in the housing market.We look forward to working closely with FHFA leadership in the months and years to leverage housing finance to reduce the racial wealth gap and increase housing supply, and to ensure housing affordability.Housing advocates hope that the administration will choose a permanent nominee who has an aggressive affordability agenda and is not primarily concerned with financial market risk.Van Tol stated that Sandra Thompson is a great person, but she doesn't have a bold vision for Fannie or Freddie. This seems to me to be a more safe and caretaker option than someone who has a vision to change the institutions.Alysa James, spokesperson for Brown, the progressive Senate Banking Committee Chair, stated that the senator would work with the Biden Administration to find a candidate who will fight "for all housing, in every part of the country, and for people of any income."Van Tol is trying to warn the government against nominating Mark Zandi (chief economist at Moodys Analytics) and Jim Parrott (an ex-White House economic adviser). He objected to their support of earlier housing finance reform proposals, which envisioned revoking Fannie/Freddies government charters and voiding their affordable housing obligations.Zandi, Parrott and others have been considered as possible candidates for the job in Democratic circles.Van Tol stated that I would be disappointed if the administration selected someone who is a slave to the failing ideas of the past.