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Reforming GSE Lending: A Sustainable Path for Fannie Mae and Freddie Mac
Since the introduction of affordable housing goals in 1992, Fannie Mae’s and Freddie Mac’s (the GSEs) housing finance policies have relied on increasing borrower leverage. Following the Great Financial Crisis, Loan-Level Price Adjustments (LLPAs) have been used to transfer revenue generated from lower-risk loans (less leverage) to those with higher-risk (more leverage).
This high-leverage approach, characterized by rising debt-to-income ratios, low down payments, and a near-universal reliance on 30-year mortgage terms, combined with cross-subsidies, is deeply flawed. It has led to elevated default risk, minimal sustained wealth building for low-income and minority households, and relentless increases in home prices. Since black, Hispanic, and Asian borrowers experience significantly higher delinquency rates than non-Hispanic white borrowers, the resulting outcomes are also a violation of the Affirmatively Furthering Fair Housing executive order. This paper outlines a more sustainable path: a lending model built around reduced risk, shorter loan terms, targeted subsidies, and wealth creation―not risky leverage.
This high-leverage approach, characterized by rising debt-to-income ratios, low down payments, and a near-universal reliance on 30-year mortgage terms, combined with cross-subsidies, is deeply flawed. It has led to elevated default risk, minimal sustained wealth building for low-income and minority households, and relentless increases in home prices. Since black, Hispanic, and Asian borrowers experience significantly higher delinquency rates than non-Hispanic white borrowers, the resulting outcomes are also a violation of the Affirmatively Furthering Fair Housing executive order. This paper outlines a more sustainable path: a lending model built around reduced risk, shorter loan terms, targeted subsidies, and wealth creation―not risky leverage.
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