Completing the Housing Market Reform Agenda

by William Apgar
Senior Scholar

End of year festivities and Congressional budget deliberations in 2012 unfortunately diverted attention away from the critical task of ensuring that all Americans have access to decent and affordable housing in the year ahead.  The Joint Center’s recently-released report, Getting on the Right Track: Improving Low-Income and Minority Access to Mortgage Credit after the Housing Bust, discusses what policies and programs will be needed to promote fair, affordable, and sustainable homeownership opportunities for these market segments. At the most basic level, mortgage markets rest on the ability of individual borrowers to repay their loans. Current efforts of the Consumer Financial Protection Bureau (CFPB) have set in motion a comprehensive reform of loan origination and loan servicing, including definitions as to what constitutes a good loan product with the ability to repay.  

Meanwhile, left undecided are the fates of Fannie Mae and Freddie Mac (the GSEs) as well as the future of the Federal Housing Administration (FHA) and the broader government role in meeting mortgage credit needs of historically underserved borrowers and communities. These elements are perhaps even more contentious than the rules and regulations now being implemented by the CFPB, but it is important to complete the task of rebuilding the new mortgage finance system to ensure that the near catastrophic events of the past five are not repeated.  Getting on the Right Track makes several recommendations to this end, including the following:

FHA must be retooled to meet its historic role as lender of last resort.  FHA has emerged as a vital lending source to lower-income households and households with less than pristine credit records and limited ability to accumulate the downpayment needed to purchase a home.  To be more effective in its role as lender of last resort, FHA needs to be retooled to be more than a first responder in a financial market emergency. As such, it should have the flexibility and capacity to experiment with mortgage features and adjust pricing as conditions warrant. In particular, FHA must be freed from those congressionally-imposed restrictions that limit its ability to rebuild its financial capacity to be able respond to any future mortgage market turmoil. 

Deciding on the future of the GSEs is the most complex of the remaining items on the reform agenda.  GSE reform is of course intricately entwined with current rulemaking about a borrower’s ability to repay and what constitutes a good mortgage product.   There is little doubt that without a government-backed secondary market, private capital would not be widely available in difficult-to-serve markets. It is also questionable whether, in a world with more limited government guarantees, the private sector would even serve the broader market for longer-term fixed-rate mortgage products.  Various proposals suggest that rather than eliminate government support for the secondary market entirely, a reformed set of secondary market entities should maintain a minimal presence in the market during normal times, but should be ready to scale up when private capital withdraws in times of financial stress.  Such an effort would present the operational challenge of designing and pricing a steady flow of guarantees in normal times, yet maintaining capacity to take on business quickly in stressful times.

Completing the reform agenda is important.  It took years to create today’s housing finance –system—both the good components and the bad. Completing the reform agenda, including reform of FHA and the GSEs, will take time, but it is important to push forward and complete the job in order to place the newly emerging mortgage finance system on solid footing and to ensure continued access to housing opportunities for low-wealth and low-income people and communities.