Revisiting Housing Finance: Why a Federal Role ?
Almost 10 years into the conservatorship of Fannie Mae and Freddie Mac; a homeownership rate that is stuck in general and continues to fall for African Americans; skyrocketing rents and house prices in places with the greatest job opportunities—not a pretty picture for housing finance in the United States. With tax reform completed,
Treasury’s desire to make reform a priority, and major personnel changes on the horizon in Congress and the Federal Housing Finance Agency, there is a new push for legislative action on reform. In this debate, we explore a critically important aspect of the path forward: how the federal government should support housing—both homeownership and rental—for those the market will not.
Moderated by: Ellen Seidman Non-Resident Fellow, Urban Institute
Ellen Seidman Non-Resident Fellow, Urban Institute said at 8:31 am on March 14th, 2018:
Welcome to our Policy Debate on housing finance reform, with a focus on access and affordability. Many thanks to all our debaters—a lively group with diverse opinions.
The confluence of a new administration, the announced retirements of major champions of housing finance reform in the House and Senate and the end of Mel Watt’s term as FHFA Director early next year, the drawdown of Fannie’s and Freddie’s capital—and a fairly widespread belief that our housing finance system is not optimally serving the country—have come together in a renewed debate on housing finance reform. Spurred by a draft Senate bill, many parties, with varying perspectives, have weighed in. As with the Urban Institute Housing Finance Policy Center’s (HFPC) previous Housing Finance Reform Incubator, this Policy Debate brings together many of those voices. Unlike the incubator, however, this debate is focused on the critical issues of access and affordability—for both owned and rented housing.
The problems in the current system manifest in multiple ways, as our participants have recognized in their writings over the past several years. HFPC research has set the number of “missing mortgage loans” because of an overly tight credit box at 6.3 million between 2009 and 2015 and HFPC’s February Chartbook shows only limited signs of credit easing. And the gap in the homeownership rate between black and white households is large and, in most places, growing. HFPC authors have also noted that high rents in many major metros make it cheaper to own—at the same time that ownership is also expensive.
For our first question, I’d like debaters to (i) define the federal government’s responsibility to support housing both in terms of the type of support and who should be supported;
(ii) highlight the major flaws you see with the current system; and (iii) provide a succinct bottom line description of how you think the system (including if you wish FHA, VA, RHS and the Home Loan Banks) should be reformed to better meet the government’s responsibility as you’ve defined it. I’d like to hold the pros and cons of the draft Senate bill until the second round if possible.
Ed Pinto Codirector, AEI Center on Housing Markets and Finance said at 9:06 am on March 14th, 2018:
(i) The only plausible reason for government to back the housing market is to help low- or moderate-income (LMI) families buy homes in a sustainable manner that reliably builds wealth. Current policies fail to meet this simple test.
(ii) Since the early 1990s government housing policies have resulted in higher and more volatile home prices trends, particularly at the entry level. In a seller’s market, which has predominated, prices rise faster than incomes, so long as marginal buyer, who sets the price for all, has access to higher leverage. The marginal buyer determines not only price level, but also the degree of stability, as price is not necessarily equal to value, especially in a supply constrained market. Cross-subsidies and expanded access to credit push up demand against a regulation-constrained supply. In a seller's market, when choice is restricted and the seller virtually dictates sales terms, more liberal credit is likely to be capitalized into higher prices. (Ernest Fisher).
(iii) Eliminating the GSEs and greatly reducing government support will slow price growth and homes will become more affordable with greater price stability for first-time LMI buyers. The FHA should focus on sustainable and wealth-building home purchases by first-time LMI buyers.
Tim Howard Former Vice Chairman and CFO of Fannie Mae said at 9:51 am on March 14th, 2018:
The federal government’s housing responsibilities should be to (a) devise and implement subsidy programs in support of underserved populations, and (b) foster the development of a housing finance system that will provide the lowest-cost mortgages to the widest range of borrower types, consistent with an agreed-upon standard of taxpayer protection.
The biggest flaws in the current system are that the centerpieces of the secondary mortgage market, Fannie and Freddie, have not yet been given updated, true risk-based capital standards, and that they remain in conservatorship without the ability to retain earnings or raise private capital. During and after the crisis these two companies had by far the lowest default rates of any source of mortgage credit. There is no policy reason to replace them with an untested alternative; they should be allowed to recapitalize to new risk-based standards, be given utility-like return limits and made subject to tighter regulation, and be released from conservatorship.
For subsidized housing programs, I propose a small (5-10 basis point) fee assessed on all new residential mortgages, not just those financed in the secondary market.
Mike Calhoun President, Center for Responsible Lending said at 10:43 am on March 14th, 2018:
Market participants that benefit from implicit federal government-backing must serve the public interest through enforceable obligations. Compliance with fair lending is required along with affirmative duties on regulators to further fair lending. The GSEs are required to serve all markets, credit-worthy borrowers, lenders, and must protect taxpayers. The charters of Fannie Mae and Freddie Mac require them to ensure the flow of affordable mortgage credit to undeserved borrowers and communities – in urban and rural areas. They are subject to enforcement provisions, restrictions on business, and penalties to ensure these duties are met.
Despite these mandates, our current system is far from perfect. For instance, despite the cross-subsidy in the current system, lower wealth borrowers are still assessed far too much in fees/insurance with loan level price adjustments and PMIERS. Excessive risked-based pricing has an adverse effect on people of color and leads to under service by conventional lenders.
FHFA and the GSEs must eliminate excessive risk-based pricing and do more to average price. The 2008 housing crash was caused by systemic failure and working families should not bear the burden of the risk by being forced to pay for the cost of the probability of another financial meltdown.
Mark Zandi Chief Economist, Moody’s Analytics said at 10:45 am on March 14th, 2018:
The federal government should ensure that affordable mortgage credit is widely available to creditworthy borrowers under all economic conditions. This is especially important for lower and middle income households and underserved communities.
This requires that the federal government makes available an explicit government guarantee to parts of the housing finance system. A guarantee that should be paid for by mortgage borrowers.
The current system with Fannie Mae and Freddie Mac in conservatorship is not sustainable long-term. The system will not be able to sufficiently keep up with the nation’s changing demographics and mortgage needs. Moreover, the support provided by the government to the system and the underserved will be variable and uncertain. Private capital can and should also play a bigger part in the system.
The most politically and economically viable approach to ending the GSEs’ current conservatorship is to move to a multiple guarantor system. In this system, several highly-regulated and appropriately capitalized private guarantors compete head-on. The government backstops the system for a fee that fully compensates taxpayers for any risk. To ensure that low and moderate income households are well served, high income households are charged a fee to pay to lower the costs to the underserved of becoming homeowners.
FHA reform should also be part of any housing finance reform, given the importance of the FHA, VA and USDA to promoting responsible homeownership, particularly in the most difficult times.
Laurie Goodman Director, Housing Finance Policy Center said at 10:48 am on March 14th, 2018:
I agree with Tim's description of the Federal Government's housing responsibilities. And he said it so well, that I will not repeat it.
In executing the goals, the present system has a number of policy objectives for the GSEs: preserving the liquidity of the mortgage market, which reduces the mortgage rate for all borrowers; preserving the 30-year fixed rate mortgage; ensuring equal access to the system for lenders of all sizes; bringing competitive private capital in to bear most of the credit risk; and giving all credit worthy borrowers access to the system. The problem is, the last two of these goals are inconsistent. If you ask the private market to bear the credit risk, they are going to want to price that risk at as granular a level as possible. However, that is going to price some credit-worthy borrowers out of the system.
The current system handles this tension by having the GSEs provide some cross-subsidy through their level guarantee fees and some risk-based pricing through their loan level price adjustments. Not only is this a muddled way of going about it, it’s utterly inefficient, as much of the subsidy is going to those who don’t really need it; they just happen to have poor credit. Moreover, it’s not at all clear how this support for access relates to that provided by the FHA, whose mission it is to play this very role. Any reformed system should clean this up, making the support we provide for access more transparent, more efficient and more effective.
AI
