BlackRock sees rare window for U.S. housing reform in 2013

NEW YORK Wed Dec 12, 2012 5:21pm EST

NEW YORK Dec 12 (Reuters) - The U.S. housing market is improving but Washington must get serious about much-needed reforms next year if it wants to sustain the nascent recovery, BlackRock, the world's largest money manager, said on Wednesday.

With elections over, lawmakers have a rare window of opportunity to simplify regulations and foreclosure guidelines, define the role of the federal mortgage agencies that guarantee most new home loans and attract private capital to the market, said Barbara Novick, head of government relations at BlackRock, which manages $3.67 trillion in assets.

"The political environment is conducive to change," she said. "If they miss this window, they really miss it for a long time. In 2014, there are elections for Congress. In 2015, somebody's going to be running for president. So the sweet spot is 2013."

The housing sector has become something of a bright spot this year in an economy otherwise struggling to overcome weak business confidence and falling demand from overseas.

Prices for single-family homes have risen continuously since February, and economists expect home construction to add to economic growth this year for the first time since 2005.

"Home prices are improving, inventory is declining; it's reasonable to say U.S. housing is starting a recovery," Novick said.

But she added the recovery was still dependent on the government, which she said owned between 15 and 25 percent of all mortgage-backed securities. The Federal Reserve has been buying $40 billion worth of mortgage bonds each month since September.

"Here's the problem: a lot of that government support is unsustainable. At some point, we think that comes back down to where it was, which is zero," she said. "That's a pretty big difference, and it comes back to the need for capital and where that capital comes from."

Convincing private investors to fill the gap will require clearer rules about foreclosures and principal reductions for the roughly 10 million "underwater" mortgages in which the amount owed exceeds the current value of the house.

She also said there were too many competing government programs to support housing. "There really isn't one overarching goal or one agency in charge, and someone is going to have to take the bull by the horns to get this resolved," she said, adding that more clarity will "drive whether you will see private securitization again."

Before the financial crisis, private investors played a bigger role in mortgage financing by purchasing home loans made by banks and then packaging into private mortgage-backed bonds.

This year, the vast majority of loans are owned or guaranteed by Fannie Mae, Freddie Mac and other public enterprises.

"You can't make securitization so unattractive if you also want to reduce government-sponsored enterprise involvement," Novick said.

The GSEs should continue to exist but should be downsized, have more conservative underwriting standards and should provide government guarantees for a fee, Novick said.

She declined to comment on another possible risk to housing: possible changes to the federal tax deduction on mortgage interest.

The deduction is estimated to cost the Treasury about $100 billion a year and may be restricted by politicians looking for ways to reduce the deficit without triggering $600 billion of automatic tax hikes and spending cuts at year end.

Some investors said the market was strong enough to withstand a cap on deductions.

"It could hurt coastal real estate, where prices are higher, but I don't think they'll set that limit to hurt the middle class," said Marc Doss, regional chief investment officer for Wells Fargo Private Bank. "I think there's enough stimulus, with mortgage rates where they are, that it won't derail housing."