Federal housing finance agency

What Is the Federal Housing Finance Agency (FHFA)?

The Federal Housing Finance Agency (FHFA) is an independent federal agency in the United States responsible for the oversight, regulation, and housing finance mission of key entities in the nation's mortgage markets. As part of the broader category of Government Agencies and Financial Regulation, its primary role is to ensure the safety and soundness of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBs). These entities are crucial government-sponsored enterprises (GSEs) that provide liquidity to the secondary mortgage market by purchasing mortgages from lenders and packaging them into mortgage-backed securities. The FHFA's mission extends to ensuring these regulated entities operate in a safe and sound manner while fulfilling their statutory public missions.

History and Origin

The Federal Housing Finance Agency was established on July 30, 2008, with the signing of the Housing and Economic Recovery Act of 2008 (HERA) by President George W. Bush.¹²,¹¹ This landmark legislation merged the regulatory functions of three preceding agencies: the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), and certain GSE-related authorities from the Department of Housing and Urban Development (HUD). The creation of the FHFA was a direct response to the escalating subprime mortgage crisis, which exposed significant weaknesses in the oversight of Fannie Mae and Freddie Mac.

A pivotal moment in the FHFA's early history occurred shortly after its formation. On September 6, 2008, the agency exercised its newly granted authority to place both Fannie Mae and Freddie Mac into conservatorship. This action was taken with the consent of both enterprises' boards of directors due to their severely deteriorating financial condition, which threatened the stability of the entire housing market. The conservatorships, which remain in effect, aimed to preserve their assets, restore their financial health, and ensure they could continue to provide essential support to the mortgage market.¹⁰,⁹ The text of the Housing and Economic Recovery Act of 2008 (HERA), which established the FHFA and its powers, is accessible through government resources.⁸

Key Takeaways

• The Federal Housing Finance Agency (FHFA) supervises and regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
• It was established in 2008 by the Housing and Economic Recovery Act (HERA) in response to the financial crisis.
• The FHFA placed Fannie Mae and Freddie Mac into conservatorship in September 2008, a state they remain in.
• Its mandate includes ensuring the safety and soundness of these government-sponsored enterprises and their fulfillment of public housing missions.
• The agency plays a critical role in maintaining financial stability in the U.S. housing finance system.

Interpreting the FHFA

The FHFA's actions and policies are interpreted through their impact on the U.S. housing market, mortgage interest rates, and the accessibility of housing credit. By setting capital requirements and overseeing the operations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the FHFA directly influences the volume and terms of mortgage lending. Its oversight is designed to mitigate credit risk within the mortgage system and protect taxpayers from potential losses. When the FHFA issues new regulations or guidance, market participants, including lenders, investors, and homeowners, often assess how these changes might affect mortgage availability, pricing, and overall market dynamics. The agency's public reports and announcements, available on FHFA's official website, provide insights into its strategic priorities and the performance of its regulated entities.⁷

Hypothetical Example

Imagine the FHFA is concerned about potential risks building up in the mortgage market due to rapidly increasing home prices and lax lending standards. To proactively address this, the agency might announce new guidance for Fannie Mae and Freddie Mac. For example, the FHFA could direct the GSEs to tighten their underwriting criteria for certain types of loans, or increase the guarantee fees they charge on mortgages with higher loan-to-value ratios.

In this scenario, a prospective homeowner seeking a mortgage for a property might find that the requirements for a conventional loan become slightly more stringent. Lenders, in turn, would adjust their offerings to align with the new guidance from Fannie Mae and Freddie Mac, which are the primary conduits for packaging and selling mortgages into the secondary mortgage market. This action by the FHFA, while potentially making it marginally harder for some to obtain a mortgage, is intended to safeguard the housing market from excessive risk and promote long-term stability.

Practical Applications

The Federal Housing Finance Agency has several practical applications within the financial system:

• Supervision of GSEs: The FHFA is the primary prudential regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This involves setting safety and soundness standards, conducting examinations, and enforcing compliance.⁶,⁵
• Market Stability: Through its regulatory and conservatorship roles, the FHFA works to ensure a continuous flow of mortgage credit, which is essential for a functioning housing market. During times of stress, such as the 2008 financial crisis, the FHFA's actions were critical in preventing a complete collapse of the mortgage market.⁴,³
• Housing Mission Oversight: Beyond financial stability, the FHFA also oversees the housing and affordable housing goals of its regulated entities. It ensures that Fannie Mae and Freddie Mac support lending to underserved markets and promote equitable access to housing finance.
• Data and Research: The FHFA collects and publishes extensive data related to housing and mortgage markets, including the widely cited FHFA House Price Index®, which provides insights into national and regional home value changes.

Limitations and Criticisms

Despite its crucial role, the Federal Housing Finance Agency has faced limitations and criticisms. One significant ongoing aspect is the protracted nature of the Fannie Mae and Freddie Mac conservatorships. While initially intended as temporary measures during the 2008 financial crisis, the GSEs have remained under FHFA control for over a decade, leading to debates about their long-term structure and government's role in housing. Critics have argued that the conservatorship model lacks a clear exit strategy and limits the ability of the enterprises to build adequate capital requirements independently.
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Furthermore, the FHFA's policies have sometimes drawn scrutiny for their potential impact on specific markets or consumer protections. For instance, the agency has received objections regarding proposals, such as those related to guarantee fees, that critics argued could disproportionately affect certain states or weaken homeowner protections. ¹The dual mandate of the FHFA—ensuring safety and soundness while also promoting the housing mission of the GSEs—can create inherent tensions, leading to challenges in balancing risk management with the need to provide broad access to mortgage credit. The agency's regulatory framework and oversight of entities susceptible to systemic risks, including potential exposure to new forms of receivership challenges, are continuously evaluated by financial experts and policymakers.

Federal Housing Finance Agency (FHFA) vs. Federal Housing Administration (FHA)

While both the Federal Housing Finance Agency (FHFA) and the Federal Housing Administration (FHA) play significant roles in the U.S. housing market, their functions are distinct:

The FHFA regulates the entities that purchase and securitize mortgages, thus influencing the broader framework of the secondary mortgage market. In contrast, the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), insures mortgages, particularly for low-to-moderate-income borrowers, making homeownership more accessible by reducing risk for lenders. Confusion often arises due to both agencies having "Federal Housing" in their names and their shared goal of supporting the U.S. housing market.

FAQs

What entities does the FHFA oversee?

The FHFA primarily oversees Fannie Mae, Freddie Mac, and the 11 regional Federal Home Loan Banks. These are known as government-sponsored enterprises (GSEs) and play a vital role in providing liquidity to the housing finance system.

Why were Fannie Mae and Freddie Mac placed into conservatorship?

Fannie Mae and Freddie Mac were placed into conservatorship by the FHFA in September 2008 due to their deteriorating financial condition during the subprime mortgage crisis. The conservatorship was an emergency measure to stabilize the companies, preserve their assets, and ensure the continued functioning of the U.S. mortgage market.

How does the FHFA impact mortgage rates?

While the FHFA does not directly set mortgage rates, its regulatory actions and oversight of Fannie Mae and Freddie Mac can indirectly influence them. By setting standards for loan purchases, guarantee fees, and capital requirements for the GSEs, the FHFA affects the overall cost and availability of mortgage credit in the market.

Is the FHFA a part of the U.S. Treasury?

No, the Federal Housing Finance Agency is an independent federal agency. While it coordinates with the U.S. Department of the Treasury on certain matters, particularly regarding the conservatorships of Fannie Mae and Freddie Mac, it operates separately with its own distinct regulatory authority.

What is the FHFA House Price Index?

The FHFA House Price Index (FHFA HPI®) is a public index that measures changes in single-family home values across the United States. It is a widely used economic indicator for the housing market, based on data from mortgages purchased or guaranteed by Fannie Mae and Freddie Mac.