The four government mortgage agencies⁠—Freddie Mac and Fannie Mae (known as the two government-sponsored enterprises, or GSEs), the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)⁠—have dominated America’s home mortgage market for decades. Currently, of the almost $12 trillion outstanding of the traditional first mortgage on a single-family home, about 70 percent is financed by these agencies. All four were designed and created via Congressional legislation, with revisions over time, and are directly or indirectly subsidized by the government. The mission behind the creation of these agencies has been to enable the working- and middle-class to obtain mortgages on borrower-friendly terms to support American homeownership. Behind this is the almost universal belief that sustainable homeownership is a social good, for both wealth-building and family stability.

Over time, what’s known as the “American” mortgage (i.e. 30-year, fixed rate, no pre-payment penalties) and its 15- and 20-year variations, have come to account for about 90 percent of the mortgage market, all at relatively low interest rates (as compared to other consumer loan products) – around 4 percent recently, and around 3 percent during much of the pandemic.

The four agencies have also been called upon over time to help specific and overlapping categories of families who are underserved to sustainably become homeowners, including:

• Families headed by at least one veteran. Created by the GI Bill, VA mortgages require no downpayment and provide a fringe benefit to veterans for their military service.
• Low-to-moderate income (LMI) families. Generally meaning families who occupy the bottom two to three quintiles of income distribution; in certain legislation, this is defined as those with income below 100% or 120% of the area median income (AMI) of a region.
• First-time homebuyers (FTHBs). Families who have not owned a home for at least the last three years. Most recently, this is complemented by focus on those who are also first-generation homebuyers, i.e. those who most likely do not have generational family wealth.
• Families of color.
• And families who live in low-income areas.

At times, the four agencies also try to increase the supply of affordable housing that would help these families attain homeownership, most notably through (1) manufactured housing and (2) the preservation of existing affordable housing.

A Complex Delivery System

Although one would hope the four agencies would have been designed to work like a jigsaw puzzle, with tightly-fitting pieces creating a coherent whole, the reality of how they work is considerably messier.

First, the agencies overlap in serving borrowers, leading them to significantly compete with each other in a manner not common in government programs, with different restrictions and advantages.

• Although all four agencies are government-subsidized, the FHA and VA are subsidized even more than the two GSEs, and thus have a noticeably lower cost to provide mortgages.
• The GSEs engage in risk-based pricing, with modifications to support mission-related borrowers.  By contrast, the FHA and VA do not: they generally charge all the same, regardless of the risk of the loan. The result is that the GSEs are competitively advantaged vs. FHA and VA for lower-risk borrowers, and disadvantaged for higher-risk borrowers.
• The GSEs can put expense dollars against priorities that their managements decide are wise, subject to typical corporate governance (and, during conservatorship, the approval of their regulator, the Federal Housing Finance Agency [FHFA]). By contrast, the FHA and VA have their budgets set by Congress, with all the inflexibility and restrictions that comes with it. The GSEs also operate full financial institution balance sheets, with trillions of dollars of assets, while the FHA and VA have no such balance sheets. The import of all this is that the GSEs offer greater value to primary market lenders in terms of technology that reduces cost and speeds processing, are more flexible in their dealings with those lenders, and are able to directly serve many small primary lenders which, if they wanted to access the FHA and VA, would have no choice but to go through aggregators (which they decidedly prefer not to do).
• When primary market lenders and servicers deal with the GSEs, the relationship is based upon a legal contract between two commercial entities, with disputes subject to a combination of arbitration or possibly legal court action. By contrast, when the industry deals with the FHA and VA, it is an imbalanced legal relationship, as a commercial entity is facing off against the US government, and disputes are subject to government rules that are considered by the industry to be unfavorably biased. Because of this, many primary market players simply avoid the two agencies or deal with them on a decidedly cautious basis.

The net result of these factors is that the GSEs are far larger than the combined FHA and VA – despite greater taxpayer subsidization of the latter two. In fact, by one common measure (i.e. the amount of MBS outstanding) the combined GSEs are three times the size of the FHA plus VA.

Second, there is an obvious public policy need for there to be clear and frequent reporting of how well the taxpayer subsidies that go through the four agencies result in their goals being delivered, especially with respect to all the identified groups of families who are underserved. The best we have today to meet this need for information is Home Mortgage Disclosure Act (HMDA) reporting, collected by the Consumer Finance Protection Bureau. However, HMDA is not directly focused on the four agencies or how well they deploy their taxpayer subsidies, but instead on how well underserved communities access mortgage credit from all sources. It therefore requires collecting data from thousands of primary market lenders, involves Congress at times, and naturally has lobbying around the cost burden being put on the private sector to collect and report the data. As a result, its public reporting is only done annually and desirable changes are difficult to make. While there are other sources of mortgage-related data, all have shortcomings (like being based upon a statistical sample only) in comparison to what would be ideal.

Thus, my modest suggestion: the four agencies should work together to produce, at first annually but then quarterly, a single, unified, and comprehensive report on their secondary-market mission activities to illustrate how well the government has utilized taxpayer support to reach the goal of successfully improving homeownership, especially for underserved groups of families. This could produce comprehensive and timely reporting about how much taxpayer-supported financing is received by specific racial groups, by rural families in low-income geographies, by LMI families, and so on. It could also include analysis of where the subsidies go and, hopefully, how effective they are – information that is not obviously available today.

It is my view that such reporting would significantly complement HMDA and other sources, supporting a more efficient focus on the question of how well, and at what cost to the taxpayer, the four government agencies are supporting homeownership both broadly and with respect to the beneficiaries of their specific mission activities.

To turn this idea into reality, it should take only the agreement of three individuals in the government: the Secretary of the Department of Housing and Urban Development, the Secretary of the Department of Veterans Affairs, and the Director of the FHFA; additionally, no legislation should be needed. So, it could get up and running comparatively quickly. Additionally, the burden of developing the systems required to produce such reporting could be placed mainly on the GSEs, who have the advantage of being able to flexibly finance and implement this type of initiative.