The week before Christmas, the House Financial Services Committee held a hearing titled “A Legislative Proposal to Provide for a Sustainable Housing Finance System: The Bipartisan Housing Finance Reform Act of 2018.” (A video clip and transcript of my testimony can be found here.)
As the title suggests, the proposal in question is being sold as a way to build a sustainable housing finance system, but that is exactly why Americans should be scared.
The witnesses supporting the bipartisan approach represent the following groups: the Housing Policy Council, the National Low Income Housing Coalition, the National Association of Realtors, the Mortgage Bankers Association, the National Association of Home Builders, the Community Home Lender Association, the National Association of Federally-Insured Credit Unions, and the U.S. Mortgage Insurers.
They all claim they want to make housing more affordable, improve access to credit, and improve competition in the market. But what truly unites them is the desire for some form of federal guarantees, ranging from explicit federal backing of securities to legal protections for long-term, low down-payment mortgages.
In their quest for federal goodies, they are not asking for what is best for the average American. They simply want what is in the best short-term interest of their clients.
It is particularly troubling that Congress would actually consider expanding government guarantees in housing finance, but that’s exactly what the bipartisan approach does.
Government guarantees for financial securities ensure that investors will pay little attention to the true underlying risk in those securities, and that’s exactly what led to the 2008 financial crisis. These guarantees shift risk away from the people who should bear it – see the eight groups listed above – and place it on the taxpayers.
Such risk-shifting is how the housing sector ended up with excessive leverage leading into the crisis. It’s why so many investors didn’t know or care what was in their portfolio. It is, in fact, a principal reason that builders built too many homes and prices soared to unsustainable levels.
All one has to do is listen to the witnesses at the hearing. They are perfectly transparent about what they want: federal backing so that new customers will be able to borrow money to buy homes at all times, regardless of whether the economy is doing poorly.
That’s a great short-term benefit to home builders, real estate agents, mortgage lenders, mortgage insurers, and real estate investors. But it is not a benefit to the typical prospective home buyer – it makes housing less affordable and increases the likelihood of a housing crash.
It is emphatically not the way to help low-income people. No sane financial planner would recommend that someone with low or variable income take on a 30 year mortgage with virtually no equity.
If the National Low Income Housing Coalition really wanted to ensure that “people with the lowest incomes in the United States have affordable and decent homes,” they would support teaching people to save and slowly build their credit history. They would fight against crony capitalism and support rolling back harmful government policies that make it harder for people to earn a living. Instead, the Coalition pushes for relaxed lending standards, more subsidies, and more “trust funds” that do little more than put upward pressure on prices and builders’ profits. (To their credit, it appears that they support eliminating restrictive zoning laws that increase housing costs.)
These policies do not make housing more affordable.
Overall, history shows that the steady increase in government involvement has done little to improve the overall housing situation in the U.S. From 1949 to 1968 (the year that Fannie Mae was allowed to branch out into purchasing non-government insured mortgages), government-backed home loans never accounted for more than 6 percent of the market in any given year. Yet, the 1968 homeownership rate was 64 percent, virtually identical to the current rate.
In the 1990s, the U.S. housing finance system morphed into one that was heavily dependent on implied taxpayer guarantees. From 1990 to 2003, Fannie Mae and Freddie Mac went from holding 5 percent of the nation’s mortgages ($136 billion) to more than 20 percent ($1.6 trillion). Between 1997 and 2007, Fannie and Freddie purchased nearly $1 trillion in subprime (and Alt-A) privately-issued mortgage backed securities (PMBS). By the time the crisis hit, the two companies held nearly 70 percent of all the PMBS issued.
As these government-backed giants expanded, homes became less affordable,and debt soared (as equity declined). Using the typical home-price-to-median income metric, the U.S. went from having 90 percent of the top 100 metro areas considered affordable in 1989, to less than one-third affordable in 2006 (just prior to the crash).
Things look even worse when U.S. markets are judged against other developed nations.
Robust mortgage financing exists in virtually every developed nation of the world without the same degree of government involvement found in the U.S.Yet, the U.S. homeownership rate is about average among developed nations, Americans pay among the highest mortgage interest rates, and live with some of the most volatile home price and construction markets in the developed world (5th out of 16 countries).
There simply is no compelling public need, from either existing or potential homeowners’ perspective, for the type of system that Congress created. There is even less need to expand it, as the Bipartisan Housing Finance Reform Act of 2018 does.
If Congress wants to improve the U.S. housing finance system, they will reject approaches that expand the very worst features of the existing system for the benefit of special interest groups. They will, instead, shrink the role of the federal government in the housing finance system, thus protecting taxpayers and allowing more private firms to enter the market to provide affordable housing.
It is a simple formula: do the opposite of what caused the 2008 meltdown.
This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2019/01/14/bipartisan-housing-finance-reform-a-blatant-giveaway-to-special-interests/#721ed37925f4