Calling the nation’s current housing policy both broken and inadequate, a bipartisan commission on housing on Monday called for the elimination of Fannie Mae and Freddie Mac, plus a more targeted Federal Housing Administration that returns to its roots.
The Bipartisan Policy Center’s housing commission would replace the two stalwarts of the secondary mortgage market with a “public guarantor”—an agency of last resort whose guarantee would be triggered only after all private capital ahead of it has been exhausted.
At the same time, the commission, led by two former senators and two former secretaries of the U.S. Department of Housing and Urban Development, said in its report that it is time to recognize the country’s changing demographics by placing a stronger federal emphasis on rental housing.
Noting that the nation’s 41 million renters account for more than a third of the population, the commission says government assistance falls woefully short of what is needed—and providing it where it is needed. Among other things, the panel calls for increasing funding of the low-income housing tax credit by 50 percent, adding federal funding needed to preserve tax-credit properties, and enhancing the ability of the U.S. Department of Agriculture to serve rural households.
The commission’s more balanced approach between ownership and rental housing is contained in a 136-page report, titled Housing America’s Future: New Directions for National Policy, released at a press briefing at the Newseum in Washington, D.C. At that briefing, former Senate majority leader George Mitchell, one of the four cochairs, said the 21-member panel believes it is possible that people with strictly held political positions can come together.
“One of our objectives is to demonstrate that this can be done,” he said. “We don’t present this report as a piece of legislation. We present it as a set of ideas and principles, as an example of what can be done in our country and what our country needs.”
Another cochair, Christopher “Kit” Bond, a former senator and governor of Missouri, said: “As we say in the country, this will be no small stump to jump.”
The other two cochairs are former HUD secretaries Mel Martinez, a former senator from Florida, and Henry Cisneros, a former mayor of San Antonio.
The underlying theme of the report as it concerns the housing finance system is that the private sector must play a far greater role in bearing the credit risk than it does now.
To draw private capital into the market, the report suggests winding down and eventually eliminating Fannie and Freddie over five to ten years. The government-sponsored enterprise (GSE) business model for the two companies—publicly traded with implied government guarantees—“has failed and should not be repeated,” the report says.
Said Martinez, “The implied guaranty was always hanging there. That should not be replicated.”
During the transition period, the GSE pricing structure should be raised to more closely resemble what it might look like if private capital were at risk, and the limits on the size of loan Fannie and Freddie can purchase or securitize could be lowered.
Recognizing that the market needs some sort of government backstop, the commission would replace the GSEs with an independent, wholly owned government corporation it calls a public guarantor, which would provide a limited catastrophic government guarantee for both single-family and rental housing. Modeled after Ginnie Mae, the agency that pools securities backed by federally insured or guaranteed loans, the guarantor would not buy or sell mortgages or issue mortgage-backed securities. Rather, it would guarantee the timely payment of principal and interest to investors.
In the new system, the limited guarantee would be triggered only after all private capital ahead of it has been exhausted. “The government would be in fourth place,” the report says, “behind borrowers and their home equity, private credit enhancers, and the corporate resources of issuers and servicers.”
While the report notes that ownership will continue to be the preferred housing choice of the majority, it stresses that more needs to be done on the rental front, where the market can be expected to swell as members of the echo boom generation form their own households and more baby boomers downsize from their current homes.
“Growing pressure for rental housing may push rents further out of reach for the low-income households that are least able to afford it,” the report cautions.
Besides emphasizing the need to make sure those who most need help get it, the commission recommends a new performance-based system for delivering federal rental assistance that focuses on outcomes. It would evaluate housing providers, with those achieving the highest scores being given increased flexibility to depart from standard program rules. Substandard performers, meanwhile, would be replaced.
The panel says it supports the continuation of tax incentives for homeownership. But in the ongoing debate over tax reform, it says it would accept some modification to allow for an increase in the level of support for affordable rental housing. A portion of any revenue generated from changes to subsidies for ownership should be devoted to rental programs for low-income populations, it says.
Warning that the country is largely unprepared to meet the needs of the overwhelming number of seniors who prefer to age in place in their current homes and communities, the commission also called for better coordination of federal programs that deliver housing and health care services to seniors.
“Some of the recommendations will be controversial in some sectors, to be sure,” said Lynn Ross, executive director of ULI’s Terwilliger Center on Housing. “However, the report represents the tough choices all those engaged in housing policy face today and into the future. Shrinking budgets, shifting demographics, and changing housing needs are going require a different approach than in the past. These recommendations offer one blueprint on the way forward.”
The recommendations of the Bipartisan Policy Center will be further discussed at the ULI Spring Meeting from May 15-17. Go to ULISpring.org for more information