WASHINGTON, D.C. – RealEstateRama – The Center for Responsible Lending (CRL) released Treat Fannie and Freddie as Utilities, a report finding that the best model for regulating Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) outside of conservatorship is utility rate-of-return regulation. Under this type of regulation, the GSEs would pool risk nationally and offer broad access to affordable mortgage credit nationwide.
The report recommends that the Federal Housing Finance Agency (FHFA), the independent agency regulating Fannie and Freddie since the 2008 financial crisis, continue its utility-like regulation of the GSEs outside of conservatorship to ensure that mortgage rates do not rise unnecessarily for American homeowners, which would affect low-income and low-wealth families the most.
The CRL recommendations come after FHFA’s and the U.S. Department of Treasury’s announcement that they will allow Fannie and Freddie to transition out of government conservatorship.
“It is crucial that we maintain utility-like regulation of Fannie Mae and Freddie Mac to ensure that they continue to operate in a low-risk manner and provide broad access to affordable mortgage financing, said Eric Stein, Senior Vice President at Self-Help, a community development lender and parent of the Center for Responsible Lending, and co-author of the report. “Before conservatorship, the GSEs’ rates of return were unchecked and considerably higher than today. As a result, they took greater risks to meet those targets, creating the dangerous dynamic that helped lead them into conservatorship in the first place.”
Specifically, the research report finds:
- If FHFA and Treasury release the GSEs from conservatorship, they should continue the return-regulated approach that FHFA has used effectively in conservatorship.
- This approach best supports continuation of the GSEs’ current low-risk business model and best guards against a return to past risky practices.
- If the GSEs are permitted to exit conservatorship without any constraints on their return on equity, they will have the incentive, and as a duopoly the means, to increase costs to borrowers by charging the highest guarantee fees that the market will bear. Continuation of FHFA’s de facto utility regulation would ensure that mortgage rates do not rise unnecessarily for American homeowners.
- Under a utility regime, investors would likely view the GSEs as value-focused companies with sustainable dividend capacity, which would attract investors seeking long-term, stable-returns, such as pension funds and insurance companies.
- Monopoly regulation of the electric power industry in the U.S. offers a helpful example. Because power companies provide an essential service and have high market concentration that prevents competitive pricing, the government limits them to a “fair return.” Since FHFA and the GSEs have substantially more market pricing information to guide establishing an appropriate return on equity target range, the return-setting process would be even simpler.