You are President Barack Obama, and your Summer of Recovery is looking like most lawns in the Northeast.
You succeeded in getting a financial reform bill through Congress, with many of the rules to be delivered in the future. But you have yet to address those malefactors of the mortgage market, Fannie Mae and Freddie Mac, which are bleeding cash -- almost $150 billion since the government seized them two years ago. What do you do?
1. Let Nancy Pelosi figure it out.
2. Let Barney Frank figure it out.
3. Appoint a blue-ribbon commission to come up with options.
4. Convene a conference featuring a big-name panel of experts, give it a lot of advance hype, and hold a public hearing where the panelists can look appropriately serious as they talk amongst themselves.
Obama, the former law school prof, chose No. 4. Anyone interested in the proceedings could hear opening remarks from Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan, the co-hosts. Then came two panel discussions before the attendees left for working breakout lunches. The menu wasn’t included on the agenda.
The public got a bird’s-eye view into the process when the government should be focused on principles.
To its credit, Treasury asked all the right questions when it sought public input on reforming housing finance in April. What is the proper role for government? Should that role vary depending on the segment of the market? What can we learn from other countries, such as Canada, that escaped the ravages of the housing boom/bust?
The answers to those questions are a sticking point for any reform. It’s fair to say the participants agreed on only two things: 1) the government’s involvement in 90 percent of mortgage originations is too big; and 2) Fannie and Freddie can’t remain quasi-private, quasi-public entities.
Treasury and HUD didn’t need to stage a conference to learn the U.S. isn’t getting its money’s worth from the substantial housing subsidy it provides, as Moody’s Analytics chief economist Mark Zandi told the audience. Or that those subsidies channel resources to housing that could go to more productive areas of the economy. Or that the country can no longer afford them.
On the big question of the proper role for government in housing, there are only two reasons for government to be involved, says Tom Lawler, founder and president of Lawler Housing and Economic Consulting in Leesburg, Virginia. The first is private market failure. The second is the societal benefits from government support for affordable housing.
The private market, where mortgages that don’t conform to Fannie/Freddie standards are originated, securitized and sold to investors, isn’t working right now. That doesn’t mean it can’t or won’t in the future. The securitization market for auto loans and credit-card receivables is functioning fine.
Home loans that meet sound underwriting standards with a 10 percent to 20 percent down payment can and “should be done through private securitization,” says Peter Wallison, director of financial policy studies at the American Enterprise Institute in Washington.
Fine. But how do we get from here to there?
Too Much Housing
“It’s not that complicated with Fannie and Freddie under government control,” Wallison says. Once the private market revives -- and it may take years -- we should “gradually reduce the size of the mortgages they can buy until it gets down to the limit for FHA mortgages,” he says. Then they can be privatized or liquidated.
The Federal Housing Administration, part of HUD, insures mortgages made by approved lenders up to pre-set limits: $217,050 for a standard single-family mortgage in Middle America and as high as $729,750 in ritzier areas of the country.
“The FHA ‘should return to doing what it was intended to do,” which is provide access to affordable housing for low- and moderate-income families, Wallison says.
The problems with housing go deeper than mortgage finance. It’s a case study in government using the tax code to achieve socially desirable ends and finding out you can have too much of a good thing.
Because homeownership was deemed to be “good” (See Summers, Larry, “No one ever washed a rented car”), housing became a tax-advantaged asset. Mortgage interest and real estate taxes are deductable. The first $250,000 of capital gains ($500,000 for a married couple) from the sale of a home is exempt from taxation as long as you have lived in it for two years.
Wallison says the accepted government narrative that Fannie and Freddie followed private lenders into the subprime arena is just plain false.
“Fannie and Freddie had affordable housing requirements imposed on them by HUD in the early 1990s,” starting at 30 percent of the loans they purchased and rising to 56 percent by 2005, he says. “Wall Street followed Fannie and Freddie.”
Congress used Fan and Fred to promote affordable housing while keeping the costs off-budget. (FHA obligations are on- budget.) Some of the recipients of the largess, who have lost their homes to foreclosure, must be wondering if homeownership is a worthy goal.
“That’s an issue for social policy, not economic policy,” Wallison says.
He’s right. Which makes you wonder why Treasury, not the Department of Health and Human Services, hosted Tuesday’s conference.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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