Now that the Senate has confirmed Mark Calabria as the director of the Federal Housing Finance Agency (FHFA), the Trump administration can implement important reforms to make housing more affordable. Calabria need not—and should not—wait for Congress to act.
A full decade has passed since the mortgage meltdown, yet virtually the same system remains in place. Congress whiffed on making any meaningful reforms to the housing finance sector.
Even Dodd-Frank’s supposed mortgage reforms – the qualified mortgage (QM) and the qualified residential mortgage (QRM) rules – came with very few teeth. Due largely to special exemptions granted by the regulators, all these rules did was raise consumers’ cost and push most of the lower quality loans from banks to non-bank lenders.
The so-called QM patch, for instance, has simply allowed Fannie and Freddie to continue to fund loans with higher debt-to-income ratios than what was originally intended in the QM. (FHA-insured loans are even worse.)
As it stands now, Fannie and Freddie remain under government conservatorship, as dangerous as ever. Home prices are rising in almost the same pattern they displayed leading into the 2008 crash, and the goal of federal policy remains to get as much mortgage debt into the system as possible. It is a recipe for disaster.
Luckily, the administration can now reverse these dangerous trends, protecting taxpayers and making housing more affordable.
There are many ways the FHFA can start implementing reforms, but it makes the most sense to start by reversing policies that are clearly not designed to help make homes more affordable for low and moderate-income buyers.
Throughout the next two years, for instance, the FHFA can shrink Fannie and Freddie’s footprint by ending all of their activity that is not directly related to purchasing loans made to buy a primary single-family residence. The perfect place to start would be for the FHFA to announce that Fannie and Freddie will no longer acquire:
- cash-out refinance loans,
- non-cash-out refinance loans, or
- loans made to buy non-owner occupied homes, including all investment properties and second homes.
If people want to refinance their homes and use some of their equity to remodel or buy a new car, that’s perfectly fine. But there is no reason – related to affordable housing – that the federal government should back this type of financing. (These types of loans – both cash out and non-cash out refinance – accounted for nearly 40 percent of the loans that Fannie and Freddie acquired in 2017.)
The same logic applies to non-owner occupied homes. It strains all reason to suggest that federal backing for debt on vacation homes and investment properties helps provide affordable housing for low-income families. (These types of loans made up almost 10 percent of the loans Fannie and Freddie acquired in 2017).
Next, the FHFA could eliminate Fannie and Freddie’s high cost loan limits and start reducing the conforming loan limits. Federally backing $700,000 and $450,000 home loans simply does not help low-income homebuyers.
More broadly, federally backing these loans does not make housing more affordable. If home prices in any given area rise to two and three times the typical U.S. home price, federal policies that make it easier to borrow these larger sums put more upward pressure on these home prices.
The timing is perfect, too, because the Federal Housing Administration has just announced it is finally going to do something about all of the high risk loans (low credit scores and high debt-to-income ratios) it has been insuring. For a trifecta, the CFPB could announce that it will let the QM patch expire, finally giving the private market a reason to start providing more loans.
Long before the 2008 crash, lobbyists used the affordable housing meme to hijack all attempts to reform the U.S. housing finance system. The truth, though, is that virtually none of the special interests clamoring for housing finance reform wants affordable housing.
These groups simply do not want lower home prices. Lower home prices do not help elected officials at the local, state, or federal level. They do not help current homeowners, banks, investors, or real estate agents. It should surprise no one that as these groups have successfully lobbied Washington for more goodies, home prices have continued to go up faster than people’s income.
If Congress and the administration really want to make housing more affordable, they will seize this new opportunity to shrink the federal government’s role. Americans would be best served by a vibrant, competitive housing finance market – the polar opposite of what the U.S. government has created.
This piece originally appeared in Forbes