Yesterday, the Treasury Department held a conference on the “Future of Housing Finance.” The summit — drawing together major governmental, housing-industry research and private-industry figures — came as the Obama administration develops a plan to overhaul Fannie Mae and Freddie Mac, the government-sponsored enterprises that have required a $150 billion taxpayer bailout thus far. The participants came from a wide variety of viewpoints. But all recognized that the days of the government boosting homeownership for all are over. Mark Zandi, the chief economist for Moody’s Analytics, put it this way: “Not everyone can or should have a single-family home.”
[Economy1] That stands in stark contrast to the policies of the Bush administration, and administrations prior to it. Eight years ago, President George W. Bush told a crowd in Atlanta, Ga., “I do believe in the American Dream. I believe there is such a thing as the American Dream. And I believe those of us who have been given positions of responsibility must do everything we can to spotlight the dream and to make sure the dream shines in all neighborhoods, all throughout our country. Owning a home is a part of that dream, it just is. Right here in America if you own your own home, you’re realizing the American Dream.”
Today, such a line of argument sounds little better than absurd. In the 2000s, innovations in housing finance let many Americans with low incomes or tarnished credit purchase a home. But too often, that home fell far outside their price range. Often, lenders offered them contracts for no money down, with complicated fees and variable interest rates. Banks and financial companies encouraged homeowners to take out products like home-equity loans, designed to encourage homeowners to see homes as piggy banks rather than a place to live.
When the housing bubble burst, those homeowners — millions of them — could not make their mortgage payments. Many ended up underwater, owing more on the mortgage than the home was worth. That meant they could not sell the house to move somewhere cheaper — or somewhere with more jobs — without owing the bank a check. The second liens made the problem worse, leaving families more in debt. Banks repossessed 860,000 homes in 2008, 918,000 in 2009 and are on track to repossess more than 1 million this year. For the millions of families who have lost their homes, dreams turned to nightmares.
In the wake of this housing disaster, federal policymakers are seeking to keep the housing market afloat — meaning encouraging people to buy houses — while trying also to reform how housing finance works, pulling the government away from backstopping the entire mortgage market. The conference touched on myriad subjects — most notably, what to do with Fannie Mae and Freddie Mac, currently backing about three-quarters of home purchases. But it also touched on how to separate the goal of promoting homeownership for low-income Americans — a goal itself under question — from broader questions about the role of government in housing finance.
At the Treasury summit, Ellen Seidman — an executive vice president at ShoreBank, a community-development focused bank holding company — highlighted the housing woes of low-income Americans after the bubble burst. She noted that some 18.6 million households spend more than half of their income on housing — one in four renters, and one in eight owners. Just a quarter of households eligible for federal assistance for rent receive that income. And in most places, families need multiple minimum-wage jobs to meet a standard rental price.
She argued that the government needs to remain involved in helping qualified low-income families receive home loans. And she argued that the Dodd-Frank financial regulatory reform bill and ongoing consideration of Fannie and Freddie might actually kill efforts to help low-income families access home loans, “because they’re ridding the market” of institutions providing liquidity to that segment of the market.
Treasury Secretary Timothy Geithner agreed. In a prior speech, he noted: “We need to delineate more clearly the public policy goals of how best to promote reasonably priced and stable mortgage costs for most Americans from how best to provide access to affordable housing for lower income Americans.”
At one of the conference’s panels, participants noted that the government needs to scale back. “The government’s role in housing needs to be pulled back quite significantly, certainly compared to where it is today, but also compared to where it was prior to the crisis,” Zandi argued. But he noted the plight of low-income homeowners. “When housing values are falling, nothing works well in our economy. The home is still the largest asset on most people’s balance sheet.”
Lew Ranieri, the “godfather” of mortgage finance and a former Wall Street executive said, “a need to expand homeownership” drove the crisis, but “it was much more the profit motive than any political motive to expand homeownership” that led to the proliferation of bad mortgage products. To that end, he argued that the Dodd-Frank financial regulatory reform law makes a major omission in not addressing second liens. He argues the government needs to regulate “home as shelter, not as a credit account.”
Bill Gross, the cofounder of PIMCO and a major bond investor, believes that “full nationalization” of Fannie and Freddie will be necessary: That the government is the housing market, and needs to remain so. “To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” he said. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”