The Urbanist Case Against Fannie Mae and Freddie Mac

The Congress for the New Urbanism (CNU), an advocacy group working to reform local development practices, is seizing on House Financial Services Committee Chairman Barney Frank’s (D-MA) recent call for a new system of housing finance to replace government-controlled Fannie Mae and Freddie Mac.

liveworkplay_0726_B_227477l.jpgMixed-use developments, such as Atlanta’s Atlantic Station (above), are often incompatible with Fannie and Freddie’s rules. (Photo: AJC)

The CNU’s concerns about Fannie and Freddie, which the government has used for more than 40 years to promote home ownership by backstopping trillions of dollars in mortgage loans, predate the government’s takeover of the two entities in 2008.

Urbanists’ frustrations with Fannie and Freddie stem from a key fact: both mortgage guarantors will not deal in home loans for properties with more than 20 percent of space set aside for non-residential use. Plans for walkable, mixed-use complexes that combine housing, retail, and office space, therefore, are often out of luck.

"Every Main Street in America violates Fannie Mae’s and Freddie Mac’s
rigid standards," CNU President John Norquist said in a statement yesterday reiterating his group’s support for housing finance reform.

Citing "plenty of mixed-use streets" in major cities where Fannie and Freddie have played no role in development, Norquist added: "These neighborhoods often have
impressive purchasing power, transit-service and the potential to be
sites of new opportunity and green redevelopment, but this flawed
government-subsidized lending approach works to keep them locked in a
pattern of disinvestment."

Norquist and fellow urbanists have reason to hold out hope for government housing support to take on a more pro-urban cast in the coming years. The Obama administration’s new inter-agency sustainable communities task force plans to spend some of its initial $150 million allocation on encouraging the issuance of "location-efficient" mortgages that take lower transportation costs into account, rewarding borrowers who move to more walkable or transit-rich areas.

But where Fannie and Freddie is concerned, Congress has shown little appetite to make the difficult choices necessary to phase in a new framework for what’s known as the "secondary mortgage market."
Treasury Secretary Tim Geithner followed Frank’s comments by admitting to PBS that restructuring the mortgage giants probably would not occur this year, calling it "a complicated thing to get right."

And even as Frank predicted that lawmakers would work this year on a new face to replace Fannie and Freddie, he did not address the charges of anti-urban bias long leveled by Norquist’s CNU. Less than one year ago, however, Frank publicly questioned Fannie and Freddie’s decision to tighten their rules on lending for all-residential condo developments.

  • J Winton

    As a residental underwriter, I think this is a good idea. To compensate for a risky collateral, the credit, capacity and capital needs to be strong. If the customer had 680+ credit, 30% downpayment with reserves and ratios of 28/36, this would be an acceptable risk. If someone gave me $50 Million or more as seed money, I would be agreeable to lending to people who meet these qualification on mixed use property.

  • rejected

    @ J Winton, can you address this conundrum?: Last summer I applied for and was rejected for a refinance loan on a property I have >20% equity in by my original purchase price and ~50% by current assessments. Credit rating >=800. Wanted to go from 30 yr fixed to 15 with a lower interest rate and get a lower monthly payment too. The loan was rejected after about 2.5 months for the reason that the sq footage was below the min. for FHA loans. However I wasn’t applying for an FHA for the refinance; and The property (a condo) is in an FHA approved building; and I originally purchased it 10 yrs ago with an FHA. I didn’t follow up b/c a death in the family took my emotional resources. But I was left with the impression that if I wanted to/needed to sell this property I wouldn’t be able to b/c it doesn’t meet the current min. sq footage for someone else to get a loan to buy it. Do you know anything about this?

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