Wide-scale mortgage reform is turning out to be harder than the crisis that spurred it. During the economic downturn, financial subsidies to the nation’s biggest mortgage servicers served as emergency medicine, but long-term remedies to the vulnerabilities of the U.S. mortgage system are a lot more challenging.
That’s because so much of the aftereffect of the housing boom is still in the industry’s bloodstream. With refis down and purchase mortgages not filling the slack, there are fewer transactions to fuel the habit.
Fannie Mae and Freddie Mac received $188 billion in taxpayer funding from 2008 to 2011, but subsequently have returned nearly $203 billion to the government. Yet taxpayer support of the government-sponsored enterprises (GSEs) is in question. The Senate Banking Committee has passed the Housing Finance Reform and Taxpayer Protection Act of 2014, a GSE reform bill originally sponsored by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, on to the full Senate. The Senate Banking Committee’s 13-9 vote was three votes shy of forcing a vote on the bill in the full Senate, so its near-term future is in question.
The bill would make private entities liable for 10 percent of the first losses in mortgage defaults. That hasn’t happened before. It would also dissolve Fannie and Freddie over five years, replacing them with a new regulator, the Federal Mortgage Insurance Corp., which would take over supervision of the Federal Housing Finance Administration.
Despite the revival of Fannie and Freddie since the economic crisis, support for GSE reform in favor of a competitive private market is growing. The Mortgage Bankers Association President and CEO David Stevens said at a recent conference that the association supports GSE reform, that the current housing finance system is “unsustainable,” and indicated that in the event of another downturn, Fannie and Freddie would be back at the Treasury seeking another fix. Under the current terms of their conservatorship, recapitalization is “legally impossible,” he said, calling GSE reform “the last and most significant unresolved issue from the housing recession.”
Other organizations have weighed in on how to wind down Fannie and Freddie. The National Association of Realtors, the National Association of Home Builders, the National Housing Conference, and even Habitat for Humanity, support GSE reform. Other reform advocates say the uncertain future of mortgage reform is shutting out many homebuyers.
Free-market organizations oppose the bill (probably no wonder, considering that 10 percent deductible). They maintain that the reform requires higher payments from low-risk borrowers to subsidize borrowers with less good credit and community action groups. They suggest a subsidy program funded through appropriations. That’s a clear signal that the market isn’t signing itself into rehab.
Except for desirable market hot spots (including Greater Boston) and areas in the Sand States where prices have rebounded from lows far worse than the Northeast has seen, the housing market still has plenty of areas of drought. The housing-industry addict who just got the Narcan is far from recovery, and we haven’t figured out what long-term rehab is supposed to look like.
