Just about every area of the Executive Branch is experiencing major turnovers as the second Trump Administration fills out its appointments below the Cabinet Secretary level. NTU is carefully observing, analyzing, and commenting on policies affecting taxpayers that those critical personnel need to be able to tackle first. While entities such as the IRS come immediately to mind for needed reforms when new leadership takes charge, taxpayers have billions—even trillions—at stake in areas of government they would not expect. Among these is federal housing policy, which is in the spotlight as the nomination process will soon begin in the Senate for Bill Pulte as Director of the Federal Housing Finance Administration (FHFA).
Just a few items of concern to taxpayers in housing include the mounting liabilities of the Federal Housing Administration, management of the Opportunity Zone and Low-Income Housing Tax Credit programs (shared with Congress), Community Reinvestment Act regulations, and costly Community Development Block Grants. Overshadowing all of these, however, are the two mortgage guarantee giants, Fannie Mae and Freddie Mac, which is where FHFA comes in.
These Government-Sponsored Enterprises (GSEs), which have been in taxpayer conservatorship for more than 15 years, currently hold more than $13 trillion in liabilities. And while Secretary of Housing and Urban Development nominee Scott Turner would have jurisdiction over many of these programs, oversight of Fannie and Freddie belongs to FHFA. To taxpayers, the FHFA Director nomination has almost as much importance as the jobs of Treasury Secretary (for which Scott Bessent has been sworn in) and IRS Commissioner (whose current nominee is Billy Long).
Recently, President Trump nominated Bill Pulte to replace Sandra Thompson as Director of FHFA. Pulte, a private equity executive and philanthropist whose grandfather is a familiar name in home-building, could bring private-sector knowledge of the tax, regulatory, and other government barriers to expanding the residential housing supply. He is, however, new to the Washington bureaucracy. For this reason, NTU humbly offers the following policy assessments and recommendations to the incoming FHFA team.
In the latter part of the Biden Administration, FHFA took policy directions that have often left housing finance experts scratching their heads—and number-crunchers wearing out their keyboards. Under former FHFA Director Thompson, Fannie and Freddie have been allowed to embark on a massive “Enterprise Credit Score and Credit Reports Initiative.” One major element of this scheme requires lenders to provide two credit scores instead of one—the new FICO 10T and VantageScore 4.0—for each loan that they seek to qualify for underwriting by Fannie and Freddie. Another part has to do with requirements to use credit reports in evaluating loans. Known as “bi-merge,” FHFA is essentially green-lighting less information than the previous tri-merge standard, raising concerns about safety and soundness of loans.
NTU has written a great deal about the credit score model controversy. If the policy is employed in the service of simply qualifying more loans for Fannie and Freddie to underwrite, without regard to the robustness of the models, then taxpayers will be left holding more “bad paper.” This is a severe concern, as NTU pointed out two years ago during an FHFA “listening session”:
Federal finances overall have the least capacity in modern history to absorb another fiscal shock from the housing GSEs. Earlier this year, the projected federal deficit for Fiscal Year 2024 surpassed $1.9 trillion, after the Congressional Budget Office revised its projections massively upward. The gross accumulated federal debt, as a percentage of Gross Domestic Product, currently tops 120%. Such a high percentage, as NTU Foundation’s Demian Brady noted in a recent in-depth analysis, is a danger sign for even well-capitalized economies in the developed world.
Recently tightened capital standards for Fannie Mae and Freddie Mac, which NTU supported as a protective measure against future infusions of taxpayer cash, are being reconsidered. The impact of new compliance burdens from multiple scores on the financial positions of both GSEs becomes especially important if FHFA is moving in the direction of eased standards.
As NTU noted in a 2019 study, the range of other federal programs relying in some fashion on credit scores is broad, extending to the Federal Housing Administration, the Department of Veterans Affairs, and even the Small Business Administration. All told, the study estimated that some $7 trillion of programs connected to taxpayers are likewise connected to credit scores. If the agencies administering these ventures follow the lead of Fannie and Freddie with multiple scores, the costs and risks to taxpayers will multiply.
In any case, the compliance tab for a multi-score regime will likely be higher than estimated. While FHFA’s own range of as much as $614 million was bad enough, NTU’s experience with paperwork burden estimates from tax compliance suggests that the actual tab for the private sector could be much higher. Multiple scores, while not the same, would still involve not entirely dissimilar problems, including reprogrammed application systems, additional recordkeeping, retrained existing employees and hired “compliance personnel,” and added information security measures. The same is true for bi-merge, which gave two dozen industry groups cause to coalesce and call for a “recalibrated timeline that accommodates both data analysis and modeling as well as a stakeholder engagement process that considers the costs, complexity, consumer impact, and policy implications of the transition.”
Today, the concerns NTU outlined are still proximate and valid, yet answers about the decision-making process behind the dual model scoring option remain distant. In a May 2023 hearing, Director Thompson assured members of the House Financial Services Committee that her office and the GSEs “are committed to working with stakeholders to ensure a smooth process towards the use of the new credit score models and the new credit report requirements in a manner that avoids unnecessary costs and complexity.”
But a heavily-redacted FHFA Inspector General report released in 2023 provided ambiguity instead. The IG claimed FHFA “performed the independent analysis required” by law to implement the dual-scoring model dictate, but also cited FHFA for the “absence of a documented conclusion in the decision record regarding safe and sound operations at the Enterprises.” No wonder the Housing Policy Council filed a Freedom of Information Act (FOIA) request with FHFA for documents surrounding the Enterprises’ Business Assessments of the new credit score models, FHFA’s decision-making process to validate and approve the two final models, and the decision-making process for bi-merge.
The next management team at FHFA has an opportunity—indeed an obligation—to be transparent and accountable to taxpayers. Here are four initial steps that would demonstrate a commitment to this obligation:
Commit to prompt, full disclosure of the decision-making process at FHFA that arrived at the costly dual credit scoring rulemaking, one that will comply with the letter and the spirit of the FOIA request mentioned above. Once Congress and the taxpaying public have the opportunity to review this information, FHFA should organize another formal input process, such as an RFI or structured listening session, to receive updates on how lenders, other providers, and consumers are shouldering the additional burdens of the rulemaking roughly two years after two models were approved for use in the industry.
Conduct more accurate private sector costs and risk assessments if other agencies adopt the precepts of the Enterprise Initiative that FHFA is implementing. The Office of Information and Regulatory Affairs, as well as the Small Business Office of Advocacy, should be consulted in developing meaningful metrics that taxpayers can use to weigh the costs and benefits.
Police Fannie and Freddie’s activities more vigorously for mission creep. FHFA’s conditional approval allowing Freddie Mac to purchase second mortgages could imperil taxpayers and represents an even deeper intrusion into mortgage markets. An original rulemaking proposed in 2021 regarding stricter oversight of Fannie and Freddie’s new activities should be updated and strengthened in 2025.
Collaborate with members of Congress and the Executive Branch to explore options for releasing the GSEs from taxpayer conservancy and into purely private entities. Recently, some members of Congress have taken an interest in “privatizing” Fannie Mae and Freddie Mac. NTU has been down this road before, with the destination nowhere in sight. Nonetheless, FHFA could analyze less sweeping alternatives to outright privatization, e.g., gradually introducing private sector risk transfer mechanisms like reinsurance, to reduce the risks for taxpayers. At the very least, FHFA should advocate against any erosion in the capital standards for the GSEs, which could worsen financial exposure to taxpayers.
Beyond all else the new FHFA Director may confront, one guiding principle to be followed is embedded in the statutory mission statement of the agency itself: “Ensure the regulated entities fulfill their mission by operating in a safe and sound manner to serve as a reliable source of liquidity and funding for the housing finance market throughout the economic cycle.” To taxpayers, “safe and sound” are the three key words to abide by going forward.