Fannie Mae may offer title insurance, which goes beyond its mandate.

Just fifteen years after the bailout of Fannie Mae
FNMA
and Freddie Mac cost American taxpayers $187 billion, the government-sponsored enterprises (GSEs) are intent upon expanding their authority once again without the approval of regulators, Congress, or the real estate industry.

Fannie Mae recently moved to expand its role in the nation’s real estate system far beyond its stated charter. The enterprise – which is still under conservatorship – is playing with fire.

Fannie Mae’s charter is expressly outlined in the Federal National Mortgage Association Charter Act, which specifies that it is to provide stability in the secondary market for residential mortgages by purchasing home loans and mortgages in the secondary market, folding them into securities, and then selling them to institutional and individual investors.

However, Fannie Mae appears to be pursuing significant policy changes that creep far beyond its mission. In March, Politico reported that Fannie Mae was considering a pilot program that would waive title insurance requirements for certain lenders, which constitutes a major departure from current policies. This pilot program would turn Fannie Mae into a de facto title insurer, with the GSE becoming responsible for handling claims if a title-related issue is discovered.

While exploring ways to modernize our real estate system is critical, Fannie Mae should be working transparently with industry partners, and not operating in a vacuum.

This is not the first time that Fannie Mae has attempted to expand its role in recent years. For example, five years ago Fannie Mae drew scrutiny after rolling out a pilot program for enterprise-paid mortgage insurance (EPMI), which would effectively bypass the capital and operational standards for private mortgage insurers.

There is a reason why the title industry is subject to rigorous regulation and oversight. When shortcuts are taken, it does not end well for the housing finance system, consumers, or lenders. While Fannie Mae did not single-handedly cause the housing bubble to collapse in 2008, it did make poor business decisions and held insufficient capital to manage its risk properly. As a result, it received a large government bailout and remains under conservatorship to this day.

However, thanks to strong underwriting standards, the title insurance industry proved its ability to reliably pay claims, many fraud-related, even during the Great Recession.

During this current time of economic uncertainty, Congress and FHFA need to keep a close eye on the GSEs and halt any activity that creeps beyond their charters. Fannie Mae is not in the title business and it was not established, nor is it regulated for such.

Fannie is in the mortgage-backed securities business to provide liquidity to the secondary market, and it should not be allowed to expand into primary market business activities. Any new products or activities piloted by the GSEs should go through a rigorous product approval rule process that would include significant public comment and stakeholder input.

Rather than attempt to replace well-functioning private market actors, Fannie Mae should stay in its lane and do what it was designed to do.