FHA:The Connection with Fannie Mae and Freddie Mac

by Karen Lawson
May 17th, 2010

A  recent blog post for the Huffington Post proposes merging Fannie Mae and Freddie Mac, and eliminating their public purpose mandates for making home ownership accessible to low and moderate income borrowers. From the position of reducing government spending and duplicated efforts, the merger may make sense; Jerry Chautin, the post’s author, points out that FHA already serves low to moderate income borrowers with its mortgage insurance program. This seems to suggest that were Fannie and Freddie to merge, FHA would assume these agencies’ roles for serving low to moderate income families and communities.  This proposal, although unlikely to occur any time soon, would mean that FHA would assume an even greater role in assisting low to moderate income buyers.

 Increased FHA Role Suggests More Government Influence

Potential issues with transferring Fannie and Freddie’s missions for providing affordable housing to FHA could include:

  • Increased loan volume for FHA approved lenders: If FHA becomes the major entity serving low to moderate income buyers and homeowners, FHA lenders will see a spike in FHA loan originations and refinancing. When FHA took on the bulk of the sub-prime market during 2006, FHA lenders became overwhelmed with loan volume, and some cut corners. This has cost FHA most of its cash reserves fore reimbursing mortgage lenders for losses associated with foreclosures. I’m not sure that any move to increase FHA’s market share is a good idea until FHA survives the expected foreclosure bubble stemming from loans it insured in 2007 and 2008. In any case, FHA must shore up its reserves before exposing its mortgage insurance program to an increase in potentially risky mortgage loans.
  • Who will buy low to moderate income mortgage loans: Fannie Mae and Freddie Mac provide capital for mortgage lenders by purchasing the loans made by their approved lenders. FHA is not a mortgage lender, and  won’t be buying mortgage loans. What happens to the secondary mortgage market for low to moderate income mortgages if Fannie and Freddie stop buying them? i’m thinking that FHA is not planning to buy mortgage loans, but if it does, we’d be back to square one with FHA functioning in a manner similar to Fannie and Freddie.
  • FHA Market Share: FHA Commissioner David Stevens notes that FHA plays a delicate role in US housing market, and affirms that FHA must not compromise private lender roles. If FHA absorbs Fannie and Freddie’s commitment to affordable housing, it could create a growing role for HUD and FHA.

Although Fannie Mae and Freddie Mac need revamping, and a merger could make sense, it isn’t realistic to expect FHA to increase its risk exposure until it’s reserves are rebuilt and the expected wave of foreclosures has passed.

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