Will the next president and Congress reform housing finance?

 Until they are forced to by a crisis, it’s unlikely the next president or Congress will pass meaningful housing finance reform.

GSE-warningBetween the GSEs (Fannie Mae and Freddie Mac) and the FHA, the government directly backs more than 80% of loan originations in the United States. Legislators recognize the GSEs should be eliminated because their implied government backing is now explicit. These entities are not private entities, although many private investors would like them to be so they could profit off the government guarantee.

Whenever people start discussing how to reform or terminate the GSEs, invariably someone will try to scare everyone by claiming US housing finance will cease to function, the housing market will crash, or some other nonsensical doomsday scenario will come to pass.

There is a kernel of truth to the fear-mongering: any reform of the GSEs will likely result in higher mortgage rates, and that won’t be welcome news to anyone. In my opinion, the near certainty of higher mortgage rates if the government backing is removed is the primary reason GSE reform hasn’t happened in the eight years since the GSEs went into “temporary” conservatorship.

Housing industry hoping for change after Obama

By Vicki Needham – 08/15/16White-House-Mortgage-Crisis

Housing industry advocates have a message for the next president: It’s time to move on from the crash.

The housing market collapsed nearly 10 years ago, yet the sector’s growth remains stagnant, with sales and construction well below their peaks in the early 2000s. …

We have moved on from the crash. Now, people must qualify for home loans based on real income, and lenders must evaluate their creditworthiness. Legislators successfully eliminated the bad lending practices that caused the housing bubble, so the housing market today is very safe and stable, which is how it should be.

Jerry Howard, president of the National Association of Home Builders, who hosted the Clinton and Trump campaigns, said it is time to get beyond the implosion of the housing market.

“We’ve now gotten far enough past the housing crisis, and I would suggest respectfully that the efforts since the housing crisis have been band-aids. And now we really need to look at the root of the problems and how to correct them,” Howard said.

Actually, many smart people in Washington looked at the problem. Two senators unveiled plans to reform the GSEs back in 2014, and despite the common-sense approach they took, reform went nowhere because nobody wanted to endure the pain of transition from a government-backed market to a capitalist market.


The new system envisioned by the Senators solves several of the problems in the current system. Instead of having a pair of too-big-to-fail entities that merely reports to a Congressional committee, the new system would have multiple insurers that report to a regulator. This should limit the amount of Congressional meddling. Further, this regulator would run a fund similar to the FDIC or FHA where the insurers pay fees to maintain a catastrophic loss fund. This fund would absorb losses before any taxpayer money was involved. The government would still back the mortgage-backed securities, but the taxpayer would be removed from the first-loss position by the insurance fund, and in theory, the government would not back the insurers.


What isn’t clear is how the new entities will be different from the current GSEs. These entities must be numerous enough and small enough to avoid being too-big-to-fail, otherwise, the implied guarantee of their operations would still be in place. Investors and bondholders in these new entities must believe that they will be wiped out before any money comes from the insurance fund or the US taxpayer. If these insurers are small and numerous, and failure of any one of them won’t disrupt the mortgage origination market and trigger any bailouts. This point is critical to the success of reform.

If the too-big-to-fail problem persists, GSE reform will be a cosmetic fix, and when we have another crisis, the US taxpayer will be on the hook again for another massive bailout.GSE_explicit_backing

Builders plan to ask the next administration to look more closely at the goals for the industry. …

On average, regulations imposed by all levels of government account for 24.3 percent of the sales price of a new single-family home, according to a May study by the NAHB.

That sounds like a big number that must be full of waste, right? But is it really?

Local municipalities in California and in other states impose fees on new development. These fees must be justified by what’s called a nexus study, which is a written document establishing a connection between the fee charged and a specific cost incurred by the local government.

For example, when the Marblehead development in San Clemente was approved, the developer was required to pay an enormous fee for road improvements. Why? Because the new regional shopping center generated a great deal of traffic, and to accommodate this traffic, major road improvements were necessary.

The development impact fees paid for essential road improvements. Without these fees, developers fail to pay the costs their project imposes on roads, schools, fire safety, police, and so on. Doesn’t it seem appropriate for new development to pay these costs?

Trump, the Republican nominee, seized on that data during his Thursday remarks, calling what is happening on the regulatory front under the Obama administration “horrible.”

“No one other than the energy industry is regulated more than the home building industry,” Trump said. “Twenty-five percent of the cost of a home is due to regulation. I think we should get that down to about 2 percent.”

trump_towersLOL! 2%?

Well, Trump’s pandering probably gained some support among my colleagues in the land development industry, but how exactly can the president negate a local jurisdiction’s right to collect fees necessary to offset the costs of new development? Obviously, the president doesn’t have this power, and nobody would want Washington to meddle in local politics that way.

The Republican presidential nominee vowed to wipe out a majority of the regulatory burdens starting with a moratorium.

“We will impose a temporary moratorium order on new agency regulations,” Trump said.

“We’ll cancel all illegal and overreaching executive orders signed by President Obama,” he said.

“We will eliminate all regulations that kill jobs. We will remove the bureaucrats that only know how to kill jobs and replace them with experts who know how to create jobs without regulations.”

Each of the statements above is sheer lunacy.

How will Trump identify those bureaucrats that kill jobs? Who are these “experts” that know how to create jobs? Why hasn’t anyone replaced one with the other before?

Stevens said a wholesale elimination of regulations from lending and servicing to construction would be difficult.

“A pledge by a candidate to roll back regulation is not as easy to complete as it is to say it because a lot of it would require Congress to roll it back,” he said.

And Congress won’t roll back anything. Dodd-Frank is here to stay, and any attempts to roll back any part of it will be greeted with a Democratic filibuster. Unless Trump wins in a landslide and his coattails brings the number of Republican senators to 60, Congress won’t be rolling back anything.


GSE Reform

Everyone in Washington knows the GSEs must be eliminated because the GSEs can’t exist outside government conservatorship. The taxpayer liabilities from backing most mortgage loans are enormous, and taxpayer backing for the GSEs ensures the misallocation of credit. Ed DeMarco prepared for final shutdown of GSEs, but the final implementation was left to Mel Watt and Congress, but they failed to make any progress. Concerned citizens hoping for careful deliberation and a consensus solution (good governance) will be disappointed.keep_the_gses

Washington is so polarized that politicians need a crisis to get anything done. To that end, politicians created circumstances at the GSEs likely to result in a future crisis that will generate the need for political action.

The Federal Housing Finance Agency was instructed by Congress to reduce their capital buffer until it reaches zero by 2018. The idea is to gradually move Fannie and Freddie closer to a financial catastrophe, spurring legislative reform. With no capital buffer, any losses would require the FHFA to ask Congress for bailout money. The political outcry over such an eventuality will give politicians political cover for implementing some very unpopular reforms.

Is this really how we want our government to work?

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