The government’s overwhelming presence in the mortgage market needs to end.
The U.S. housing market is finally showing signs of recovery. In 2012, new home sales posted their first year-over-year increase since the market’s collapse. Single-family home starts are up 24 percent. And with home prices rising in 94 out of 100 key metropolitan areas, the national median home price has registered a double-digit increase over last year’s mark.
Add to this mix the record profits recently earned by mortgage giants Fannie Mae and Freddie Mac, and one would think the future looks bright for the housing sector of the economy.
While we welcome these positive developments, the fact remains that our housing finance system is fundamentally broken and in desperate need of repair. The appropriate response to the good news in the market is not complacency but dedicated and focused action.
At a recent conference sponsored by the Housing Commission of the Bipartisan Policy Center (BPC), Lewis Ranieri, a former vice chairman of Salomon Brothers and current chairman of Ranieri Partners—and often referred to as the father of the secondary mortgage market for his work in securitizing mortgages—made three key points summarizing why the status quo in housing is both unsustainable and unacceptable:
The federal government should not “own” the mortgage market as it does today. More than 90 percent of mortgages are touched in some way by the government through the guarantees offered by the government-sponsored enterprises Fannie Mae and Freddie Mac, or by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or Ginnie Mae, which guarantees FHA and VA mortgages. The government’s overwhelming presence in the market not only crowds out private capital that otherwise would be willing to assume much of the credit risk associated with mortgage lending, but also kicks that capital out the door. A government-dominated system places excessive risk on the taxpayers who are ultimately responsible for any payouts in the event of a market decline.
The current “credit box” through which mortgage lending decisions are made is eliminating homeownership opportunities for working families across the country. While record-low interest rates and the sharp post-crash decline in home prices have made homeownership more affordable than at any time since the 1970s, too few families have been able to take advantage of these favorable conditions. Higher downpayment, debt-to-income, and credit score requirements are shutting many out of the mortgage market altogether. While no one wants a return to the reckless lending practices that existed in the run-up to the crash, it is clear the pendulum has swung too far in the opposite direction.
If maintained, a narrow credit box will frustrate the aspirations of millions of families to enter the homeownership ranks and will have major implications for wealth accumulation by minority households. According to Harvard University’s Joint Center for Housing Studies, over the next ten years minorities will account for 70 percent of net new households and a significant proportion of potential first-time homeowners. Yet, many of these new households will lack the resources with which to make large downpayments. Because home equity accounts for a larger share of net wealth among African American and Hispanic homeowners than it does for other population groups, restrictions on low-downpayment mortgages, even if they are prudently underwritten, will block an important means by which minority families have traditionally built household wealth.
Tight credit is limiting economic growth. Despite recent gains, spending on single-family home construction remains far below historically normal levels. In the post–World War II era, the United States has suffered through 11 recessions, and new homebuilding and housing-related construction have usually led the way to economic revitalization. A return to the reasonable underwriting standards that existed before the housing bubble, with their focus on the overall creditworthiness of the borrower, will help the housing sector make an even greater contribution to economic growth.
We would like to add a final point to Ranieri’s list: uncertainty about the fate of Fannie Mae and Freddie Mac and the future architecture of our nation’s finance system is keeping private capital on the sidelines. What a new housing finance system looks like and how it operates will determine whether affordable mortgage credit is broadly available and will affect our economy for decades to come. It is time for Washington to take on this issue without delay.
This past February, the BPC Housing Commission proposed a comprehensive reform plan in its report Housing America’s Future: New Directions for National Policy. The five key objectives of the plan are:
a far greater role for the private sector in bearing mortgage credit risk;
a continued, but more limited, role for the federal government as the insurance backstop of last resort in the secondary market for mortgage-backed securities;
the ultimate elimination of Fannie Mae and Freddie Mac over a multiyear transition period;
access to safe and affordable mortgages for all borrowers in all geographic markets; and
an FHA that returns to its traditional mission of primarily serving first-time homebuyers and borrowers with limited savings.
Through these objectives, the BPC plan seeks to ensure that consumers have uninterrupted access to affordable mortgage credit while reducing the government’s dominant role and protecting the taxpayer.
We are pleased that the plan has been well received in Congress and has helped reenergize the discussion about housing finance reform. This provides clear evidence that bipartisanship is indeed possible, even on such a complex subject. With the recent introduction of the Housing Finance Reform and Taxpayer Protection Act of 2013 by the bipartisan team of Senators Bob Corker (R-TN) and Mark Warner (D-VA), plus other developments on Capitol Hill, it appears that housing finance reform may finally be receiving the priority attention it deserves. It is critical to keep this momentum going. UL