May 23, 2005

The Honorable Michael Oxley Chairman Committee on Financial Services United States House of Representatives 2129 Rayburn House Office Building Washington, DC 20515 The Honorable Richard Baker Chairman Subcommittee on Capital Markets, Insurance and GSEs United State House of Representatives 341 Cannon House Office Building Washington, D.C. 20515

The Honorable Barney Frank Ranking Member Committee on Financial Services United States House of Representative B-310C Rayburn House Office Building Washington, DC 20515 The Honorable Paul Kanjorski Ranking Member Subcommittee on Capital Markets, Insurance and GSEs United States House of Representatives 2188 Rayburn House Office Building Washington, DC 20515

Dear Chairmen Oxley and Baker, and Ranking Members Frank and Kanjorski:

On behalf of the National Housing Conference (NHC), I appreciate the opportunity to provide the Committee comments on proposed revisions to the regulatory structure and the affordable housing missions of Freddie Mac and Fannie Mae.

The National Housing Conference is a nonprofit 501(c) (3) membership association dedicated to advancing affordable housing and community development causes. A membership drawn from every industry segment forms the foundation for NHC’s broad, nonpartisan advocacy for national policies and legislation that promote suitable housing in a safe, decent environment across the nation.

NHC supports strong Government Sponsored Enterprises (GSEs), Freddie Mac and Fannie Mae, that are dedicated to ensuring the supply of affordable mortgage credit to America. The two GSEs have been critical to the success and stability of communities across this nation by making homeownership and affordable rental housing more readily available across a broad spectrum of social demographics. Both have also leveraged technology and brought standards and efficiencies to bear in the mortgage markets which have made housing choices easier for “working” and low- to moderate-income families.

NHC, however, is concerned that proposed revisions to the GSEs’ federal charters will have unintended consequences that fail to protect “working” and low- to moderate-income families. In fact, we believe some of the proposals under consideration will reduce the GSEs’ abilities to serve the affordable housing needs that exist today and into the future.

Strong GSEs are Critical to Working Families

In just over half a decade, the number of America’s working families paying more than 50 percent of their income for housing has grown 76 percent, according to a new study entitled The Housing Landscape for America’s Working Families 2005, conducted by the Center for Housing Policy, the research affiliate of NHC. Specifically, in 1997, 2.4 million working families spent more than half their income on housing, but by 2003 this number had grown dramatically to 4.2 million. This comprehensive study also compares immigrant working families to their native-born counterparts and reveals that immigrant working families are 75 percent more likely to pay more than half their income for housing.

These new findings help shed light on a troubling trend across America – working a full-time job does not guarantee families a decent, affordable place to live. In fact, the housing problems of working families are more persistent and pervasive than many experts may have thought, and are not only confined to cities, renters, or the East and West coasts.

While the two GSEs alone cannot solve the housing needs of America’s working families, they are a critical component to the housing system that is striving to meet those needs. In 2004, the two GSEs combined assisted 6.5 million families in becoming homeowners, 646,000 of which were minority and low- and moderate-income families, and financed 887,000 of units of multifamily housing. In addition, the two GSEs assisted 696,000 families to buy their first home. Any reforms that would jeopardize their important and expansive role in the mortgage market would negatively impact the availability of affordable housing for working families.

Affordable multifamily housing is also critical to the success of working families in this country. According to the study sited above, affordability accounts for a growing share of critical needs among renters. For example, in 1997, affordability was the problem for approximately 71 percent of renters with critical housing needs, and the problem grew steadily to 79 percent in 2003. In addition, working family renters with critical housing needs were more than twice as likely as their homeowner counterparts to live in dilapidated conditions.

Limits on the GSEs’ Retained Portfolios

The retained portfolios of the GSEs are critical components of how the GSEs meet the needs of the homeownership and multifamily market. Some critics of the GSEs, however, have recommended that limits be placed on the growth of the GSEs or on the size of their retained portfolios. We strongly oppose such limits. Creating affordable rental housing and housing for homeownership in today’s market is a challenge we understand. The GSEs should have every tool available to them to continue their investment in the affordable housing market and their interest and incentive to underwrite even more innovative and affordable and multifamily and single family products. Establishing limits on their portfolios could create a major obstacle that would prevent this from happening and hamper their ability to meet their mission.

NHC is concerned about the safety and soundness of the GSEs, and we support the regulator having the ability to establish portfolio limits if they are clearly necessary to meet safety and soundness concerns. However, we strongly oppose the regulator being required by legislation to establish specific portfolio limits. Rather, the primary way to address concerns of GSE safety and soundness should be through adequate capital requirements established by the regulator.

The Bright Line Test

Similarly, the “bright line test” developed in both H.R. 1461 and S. 190 would create consequences that would impact housing affordability. Because the provision would prohibit the GSEs from any direct or indirect activity prior to the closing of a loan, the provision could put at risk existing technology, like Desktop Underwriter and Loan Prospector that has dramatically reduced the costs incurred by homebuyers. Going forward, it also would inhibit the GSEs’ authority to develop innovations in the market that would further reduce the costs of homeownership.

In the multifamily market, the bright line test would limit the ability for the GSEs to work in concert with multifamily lenders and other participants in the development of affordable rental housing prior to the closing of the loan. New and existing innovative affordable rental initiatives developed by the GSEs would be at risk, ultimately putting the housing stock of America’s working families at risk as well. We strongly oppose the bright line test because of its impact on the GSEs’ ability to serve their affordable housing mission, and we also question whether it has any the safety and soundness benefits.

Program Approval

NHC recommends that the GSEs establish a consultative relationship with their regulator that enables the regulator to make timely and accurate assessments regarding the introduction of new GSE programs. We believe the regulator should have appropriate authority to ensure that the GSE’s activities meet charter requirements and safety and soundness standards without imposing program and product approval processes that diminish marketplace innovation, hamper consumer initiatives, or reduce competitiveness.

Affordable Housing Goals

Faced with home costs five times higher than median incomes, working families are increasingly confronted with the prospect of losing out on the American dream of homeownership. While NHC supports strong goals for Freddie Mac and Fannie Mae, it is concerned that the current goal structure poses unintended ramifications that fail to protect “working” and low- to moderate-income families. NHC believes the goals’ structure should be revised to ensure that working families are not put at risk by unreasonable affordable housing goals.

If the regulator is permitted to set goal levels that exceed market estimates, or that do not account for the variances in the size of the single family refinance market, NHC fears that Freddie Mac and Fannie Mae will be forced into ignoring middle income and working families. Rather than serving working families’ needs, the GSEs most likely will “manage the denominator,” or limit the availability of the best and most affordable mortgage products, especially in higher cost urban centers. GSEs over zealous pursuit of the goals, in other words, would be a great detriment to working families seeking to reduce their mortgage cost.

In order to direct the GSEs to meet strong but appropriate housing goals, NHC recommends that the following provisions be considered:

• Set each affordable housing goal no higher than the midpoint of a reasonable market estimate of what the primary single family and multifamily markets are likely to produce – this would ensure strong but appropriate goals while reducing the likelihood of credit rationing and harm to the FHA fund.

• Remove single family refinances from the goal equation – doing so still maintains the integrity of the goal process; moreover, this approach preserves the liquidity currently available to the working family. Also, by focusing the GSEs on the purchase money market it could actually increase the availably of homeownership for low to moderate, underserved, special affordable market segments.

Affordable Housing Fund

Expanding the supply of affordable housing is critical to supporting the needs of working families. As a result, we strongly support establishing a fund dedicated to expanding the stock of affordable housing. The fund should set aside a percent of the profits of Fannie Mae and Freddie Mac to expand the support of the development and preservation of affordable housing.

The National Housing Conference is please to be able to submit these comments. If further information would be helpful, please feel free to contact me.

Sincerely,


Conrad E. Egan,
President and CEO