Analysis: Social agenda true hurdle to housing finance reform
NEW YORK (Reuters) - In March of 2000, American homeowners got a scare.
Gary Gensler, a Treasury undersecretary, threw his support behind legislation whose impact could have jacked mortgage rates up to levels that would fly in the face of what lawmakers say is good for the nation: expanding homeownership.
He wanted Treasury to cut ties with Fannie Mae and Freddie Mac -- companies whose federal charters make them the key vehicles for Washington's housing policy and mortgage market intervention.
It was a test of the companies' political backing, and the companies won. Lobbyists killed the effort amid a housing boom cheered by homebuyers and their political representatives, underscoring the power of the American dream of home ownership and its ability to drive the political and financial agenda.
One decade and a wrenching financial crisis later, social agendas remain the stumbling block for the "fundamental change" demanded on Tuesday by the Obama administration as it tries to fix a housing finance system central to a crisis rivaled only by the Great Depression.
Treasury Secretary Timothy Geithner, addressing major lenders and investors, advocated a government role in reforms needed to cushion the economy and raised the question of whether the private sector could provide a home financing regime with enough safeguards to avoid another crisis.
The challenge would be to price a guarantee in a way that protects taxpayers, he said.
"Secretary Geithner is absolutely right in pointing to the race to the bottom in credit standards," said Alfred DelliBovi, president of the Federal Home Loan Bank of New York. "What he forgot to say was this race was dictated by the political forces who were more interested in their future election campaigns than any housing programs."
"We'll get a redesigned model that will involve the government and the private sector, and I predict it will work very well until someone comes along and pushes it further than it was designed to go," he added.
The conference on Tuesday, including input from lenders and others which could compete with Fannie Mae and Freddie Mac in providing credit, was billed as a "listening session" to help the administration develop a firmer plan by January. It would be the latest starting point in the debate over how to recreate a housing finance system that has been deeply embedded in the American psyche since World War II.
Middle-class American voters have more of their wealth tied up in their homes than in any other asset class, making housing policy a political third rail many lawmakers will not approach.
From the tax deduction for mortgage interest payments to subsidized loans for first-time buyers, the federal government is deeply involved in supporting home ownership.
Congress has attempted to rewrite rules concerning Fannie and Freddie at least three times in the past decade. Each time, the companies' lobbyists were able to squash the effort.
The issue is so divisive and dicey for politicians, especially in an election year, that congressional leaders never seriously considered attaching housing reform to the massive overhaul of Wall Street rules passed this year.
Much of the debate about reforming the two government-sponsored enterprises (GSEs) stalls when discussion turns to their "mission," which to Fannie Mae is "to provide liquidity, stability and affordability to the U.S. housing and mortgage markets."
The U.S. homeownership rate edged higher as Congress allowed the GSEs to expand their "missions." By 2004, it had topped 69 percent, up from about 64 percent 10 years earlier.
As a backdrop for the debate on how to fix the two U.S. housing finance giants, the main housing regulator in February proposed to overhaul rules on how the companies aid low-income homeowners. While the regulator wants to prevent expansion in credit to riskier loans that doomed the companies, the proposed goals preserved its affordable housing mission.
REAL WRECKAGE AS BACKDROP
Attempted reform of the GSEs also comes amid signs of a faltering recovery in the housing market, which could weigh on voters at the polls in November.
Where previous reform efforts have failed, the new push has traction as the companies reel from a two-year wreckage that has cost taxpayers some $150 billion.
At question should be the government's role, rather than just the limits of the government's role, one analyst said.
One may ask "why is the government in it at all," said Thomas Lawler, a former Fannie Mae executive and founder of Lawler Economic & Housing Consulting in Leesburg, Virginia. "Is it: if there is a private market failure, or if there are social goals the private market doesn't address?"
Assuming the government retains a role, the trickier part will be pricing credit risk, which for Fannie Mae and Freddie Mac is currently lower than what the private markets would allow, Lawler said. What's more, the government has injected itself into the foreclosure crisis, raising regulatory uncertainties for the private market, he added.
Whatever the outcome, it is unlikely to be realized soon, with Americans almost fully dependent on government support.
More than two years after the credit crisis erupted, the recovery of the private home finance market is lagging even subprime auto loans. Efforts to restart the market have been stymied, in part due to GSE competition, analysts said.
"The transition issue is one that is going to bog down all the proposals for years," said Tom Deutsch, executive director of the American Securitization Forum, an industry group representing lenders, bond issuers and investors.
"You can't do any massive changes overnight, or even in 12 or 24 months," he said. "At the same time, you have to make the commitments for the private markets to come back."
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