In 2012, the federal government was involved in nearly 90 percent of new home mortgage loans, according to housing finance expert Lewis Ranieri. Ranieri—sometimes referred to as the “godfather” of mortgage finance for his role in pioneering the mortgage-backed security—gave the keynote speech at yesterday’s Bipartisan Policy Center event on housing finance reform. Urban Institute President Sarah Rosen Wartell, the Cato Institute’s Mark Calabria, and others also spoke on the panel.
The speakers all agreed on one thing: the current American system of housing finance that relies so heavily on the federal government is—as Ranieri said—both “unsustainable and unacceptable.” The forum’s aim was to create momentum for bipartisan legislative action to restore a sound and sustainable system of housing finance. Panelists were less unified, however, on whether and how quickly Congress and executive branch policymakers are likely to change that system.
Wartell sounded a note of cautious optimism, citing what she sees as an emerging consensus on what housing reform should include. “The big design framework [options are] already starting to narrow,” she said. “Capitol Hill and the executive branch are discussing things that have broad pieces in common.”
Why is the government’s role unsustainable?
In late 2008, government mortgage giants Fannie Mae and Freddie Mac were put under federal conservatorship to ensure that they remained solvent and continued lending. That measure was supposed to be short term; five years later there is no clear path for winding down the government’s role.
According to panelists, government domination of the mortgage market leads to several key problems. First, conservatorship implies a mandate limited to maintaining the agencies’ financial solvency. Therefore, these huge organizations have no clear objective either to promote affordability or foster a robust and highly liquid mortgage lending market. Yet, they are responsible for the vast majority of all new home loans in a market still turned upside down from the mortgage crisis.
Second, because Fannie and Freddie are now more profitable than they’ve ever been, Congress has no burning reason to divest them. They’re profitable to the taxpayers, so what’s the rush? Ranieri worried that the fiscal effect creates inertia that, absent other urgency, will perpetuate indefinitely a stagnant mortgage finance system. And that system poses unnecessary risks to the taxpayers while insufficiently serving the emerging housing finance needs of the country.
Access to credit is overly constrained
Before the financial crisis, a borrower with a credit score of 620 and a 5 percent down payment qualified for a prime loan. The “new normal” is now about 680 and 10 percent down, with the median credit score climbing from 730 to about 770 for government sponsored mortgages since the crisis, according to Ranieri.
These tight standards effectively exclude many families from the mortgage market, with that impact falling hardest on low- and middle-income (often minority) families. Those families therefore lose the important wealth-generating tool of forced savings in the form of homeownership, and the broader economy is the weaker for it.
What’s more, according to Wartell, over the next 35 years we will face unprecedented demographic pressure for a housing finance system to serve a growing population with changing needs. Baby boomers are aging and requiring new kinds of housing. At the same time, millennials and their successors are demanding housing in different communities than the ones older families are leaving. So the system must build, retrofit, and finance different forms of housing. A system stagnant in government conservatorship lacks the flexibility to adapt to changes ahead.
The Bipartisan Policy Center discussion suggested that practical and political challenges stand in the way of completing housing finance reform, but it also made one thing clear: reform is urgent and will require both regulatory and legislative action.
Photo of Sarah Rosen Wartell, Urban Institute and Mark Calabria, Cato Institute by Greg Gibson Photography