Realty Views By Terry Ross
Housing Finance Needs Federal Support
November 19th, 2013 – While Washington debates about how best to rid the federal government of any liability for past and future failures in the banking industry such as losses from failed mortgages, and how to raise taxes by eliminating much of the mortgage deduction, the National Association of Home Builders ((NAHB), the organization that champions the home building industry, has been on a campaign to inject some reasonable solutions into the mix of ideas.
Most of the saber rattling on Capitol Hill these days centers on trying to get most aspects of the lending business out of the control of the federal government and entirely in the hands of the private sector. A nice idea but, like many of those that float out of our nation’s capital these days, one that doesn’t work in the real world.
The NAHB recently told a Congressional hearing that, to have any chance of success, a national home finance reform package must include a government backstop component – otherwise it won’t work.
“NAHB believes that the U.S. housing finance system must be multifaceted with both competing and complementary components, including private, federal and state sources of housing capital,” said Rick Judson, NAHB chairman in an address to Congress. “To achieve this, it is important to reform and restructure the conventional mortgage market and also improve other parts of the housing finance system, including FHA, the Federal Home Loan Banks and state housing finance agencies.”
He noted that the key to the sustainability of the 30-year, fixed-rate mortgage is a securitization outlet – that is, repackaging and resale of mortgages on the secondary market as securities – because originators do not have sufficient capacity to hold such long-term assets funded with short-term deposits.
Currently, Fannie Mae and Freddie Mac provide the securities vehicle along with a government guarantee for investors.
“There are serious doubts on whether a private housing finance system would be capable of supporting this type of product without some government backing,” Judson added. “At a minimum, the cost and terms of 30-year mortgages would be significantly less favorable under a totally private system and many fewer families would be eligible for home loans.”
What the NAHB recommends is establishing a new securitization model for single- and multi-family mortgages where Fannie Mae and Freddie Mac would be transitioned into private housing finance entities that would pool mortgages into securities for sale to investors worldwide. Private capital from mortgage originators and securities issuers would be in the first loss position, but the principal and interest for investors in the mortgage-backed securities would be guaranteed through a privately capitalized, federally backed insurance fund. A strong and independent regulator would oversee the new system.
The NAHB is backing a proposed bill called the Housing Finance Reform and Taxpayer Protection Act (S. 1217), introduced by Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.), calling it an important bipartisan step in the debate on overhauling the U.S. housing finance system that incorporates many of the elements recommended by the NAHB.
The many federal and state government programs that have been developed over the years to bolster the housing markets were based on government policy that recognized that a strong homeownership base of constituents is in the nation’s best interest, both economically and from a societal standpoint. This included the development of the essential elements that ensure that there are affordable options for housing.
The Federal Housing Administration (FHA), which dates from the post-Depression era, has also historically played an important role in the financing of multi-family rental housing as well as individual mortgages for consumers. In addition, programs operated by the U.S. Department of Agriculture’s Rural Housing Service have played an important role in providing mortgage credit in underserved rural areas. The VA home loan guarantee program is an integral component of housing finance for our nation’s service members and veterans with its low-to-no down payment program available even in these difficult financing times.
“The Federal Housing Administration’s single-family mortgage programs are a unique and vital component of the housing finance system, providing access to homeownership for underserved communities, primarily first-time home buyers, minorities and those with limited down payment capabilities,” Judson said. “These products have allowed the construction of needed affordable and market rate rental housing units, and enabled property owners to acquire, refinance, rehabilitate and preserve the nation’s existing stock of rental housing.”
While builders and individual borrowers continue to struggle in a tight lending market, these recommendations from the private sector make a whole lot more economic sense than most of the proposals coming out of Washington that would just set the economy and real estate financing back more than 80 years.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call 562/498-1049.)