Reforming America’s Housing Finance Market at an all-day event held by the Brookings Institution focusing on restructuring the U.S. residential mortgage market.
The report – a joint effort by Treasury and HUD – offers the Administration’s preliminary ideas on tackling the looming issue of what to do with Fannie and Freddie, the two government-sponsored enterprises (GSEs) currently under the conservatorship of the federal government. The report proposes a general plan for reforming the U.S. housing finance market and includes three distinct approaches for altering the federal government’s role in supporting the system.
These three options range from almost complete privatization (save for the continuation of FHA) to more limited but still constant government backing. Option 1 would limit the government’s support to targeted low- and moderate-income borrowers. Option 2 would have the government acting as a backstop in times of crisis, either as a temporary guarantor with properly-priced fees or as a provisional insurer to the private market. Option 3 would have the federal government act as permanent reinsurer of mortgage securities, paying out only when private mortgage guarantors have become insolvent.
Presenters and panelists at last Friday’s Brookings event were hearing the Administration’s recommendations for the first time when Secretary Geithner presented them that morning. Nonetheless, many of the proposals put forth by these academics, advocates and practitioners closely resembled one of the three options in the Administration’s report.
All proposals, including the Administration’s, had one thing in common – Fannie and Freddie should be wound down and eliminated, although gradually. The proposed mechanisms to do so and the timelines varied, but it was clear that sometime down the line the two GSEs would no longer play a role in the U.S. housing finance market. At the same time, most proposals promoted varying levels of federal government support for the mortgage markets, mainly to keep mortgage costs low, credit widely available and securitization properly regulated.
One area mentioned in the Administration’s report, but not addressed to any great extent in the Brookings event proposals, was how to support lower-income buyers and renters as well as other underserved areas of the market, such as smaller multifamily developments and those in rural areas. The National Housing Conference (NHC) has focused on how to reach these underserved market segments. In September 2010, NHC released a document promoting 10 principles to support the financing of multifamily rental housing, particularly those undeserved segments that currently have limited access to financing.
The Administration’s long-awaited recommendations provide a structure for discussions about how to move toward a stable, sustainable housing finance system. But even the Administration admits the path to reform will be long and involve much debate among Congress, advocates, academics and the private sector. One aim seems to be clear and immediate, though – to scale back the role of government in a responsible way. The more difficult task is to determine a long-term structure for the housing finance system that will safely provide credit to a broad range of American families while limiting taxpayers’ exposure to risk.
Images via: governmentmortgageassistance.org, seattlehousing.org