Guideposts for Federal Housing Policy

CRE Finance World, Winter 2013

Guideposts for Federal Housing Policy Douglas Holtz-Eakin President American Action Forum T enterprises (GSEs, Fannie Mae and Freddie Mac), and rules will certainly have an effect on the economy, and already has.Stakeholders do not know what the market will look like in theabsence of Fannie Mae and Freddie Mac, nor do they know howcompetitive or profitable they can be if final rules for QM, QRM,Basel III and others are too narrowly written. The tightness of thesehe electoral season has ended, the political dust is settling,and the future of federal housing policy is coming intofocus. Of course, it is far from crystal clear. Reform ofmortgage finance, the future of the government-sponsored incentivizing private sector capital are a colossal undertaking. A recent American Action Forum study shows those regulations The problems are complex, a tremendous amount is at stake, and as proposed may result in up to 20% fewer loans, resulting in prolonging the status quo is an ever-present temptation. While the 600,000 fewer home sales.1 In turn, the resulting tightened lending top priority of lawmakers on Capitol Hill is and should be putting and reduced sales are estimated to cost 1,010,000 fewer housing the federal government on a fiscally sustainable path — something starts, 3.9 million fewer jobs, and a loss of 1.1 percentage points that would benefit mortgage and housing markets — plans must from GDP growth over the next three years. necessarily be made to undertake needed reforms. The reform process will likely take years, but here are four guideposts to the Together these regulations will raise the cost of borrowing for millions evolution of real estate reforms. of homebuyers, and tighten access to credit beyond pre-boom standards. These restrictions on private mortgage origination and Diminishing Uncertainty housing market activity are a significant cost of the new regulatory At present, the landscape is littered with uncertainties. There are regime and an obvious reason why they need to be settled soon four primary drivers of this ubiquitous market uncertainty: the and done right. Further uncertainty surrounds other aspects of the macroeconomic environment; the outsized government share of financial system including the Volker rule, oversight of credit rating the current market; private market concerns over forthcoming final agencies, systemically important designations and more. rulemakings; and the lack of a strategic plan for the wind-down and dissolution of the GSEs. With concern over the continued implementation of Dodd Frank and Basel III, and the perils of reducing the government’s dominant The macroeconomic environment presents the interrelated issues share of the mortgage market, there has been little to no leadership of an uncertain pace of future growth, the important exit of the on this issue apart from efforts at FHFA. In the same way that tax Federal Reserve from its extraordinary policy regime, and the and entitlement reform will require a concerted bipartisan effort reversal of unsustainable federal borrowing. More effective, with leadership from the President, so too will GSE reform. As pro-growth policies can generate the incomes necessary to spur housing markets pick up, this uncertainty must end or the system residential and commercial building, firm up the pricing of existing will not function efficiently and taxpayers will continue to bear far structures, and increase the returns to private investors. When greater risk than they realize. combined with reduced federal borrowing, it will permit the Fed to exit its current policy regime, reducing the financial uncertainty As these uncertainties diminish, it will become far easier to complete facing market participants. And eliminating the threat of federal the reform agenda and the U.S. will be much closer to a stable debt downgrades and the competition with the private sector for system of mortgage finance. bond market funds will settle the interest rate outlook considerably. Design a Federal Backstop The government’s role in real estate must diminish as well. Since In the past few years, commentators have suggested numerous plans the housing and economic crisis began more than five years ago, for the future of the GSEs. Many of these adopt a “no government the government’s role in housing has grown tremendously. As guarantee” posture that envisions unwinding the GSEs and leaving private firms pulled back to mitigate risk, the government grew private markets to undertake mortgage finance. Advocates argue to be the primary player in housing finance, now accounting for that these “first-best” solutions eliminate inefficient subsidies and 9 out of 10 new mortgages. Stringency in the private sector has the perils of moral hazard. shifted mortgage production to the GSEs and FHA, where observed standards have risen as well. However, they also lack political feasibility. With the government currently so deeply entrenched in the housing finance system, it Little effort has since been made to wind down the government’s involvement, save some efforts by FHFA, and a tremendous seems unlikely that the government can exit the market easily and that private capital will rush back in. Moreover, in a future crisis the amount is now at stake if Congress drops the ball. The potential costs of failed reform are a paralyzing force in a polarized political future Congress will intervene. Market participants will recognize this and the resultant moral hazard quite quickly. Progress will have landscape. Yet not knowing what will happen to the GSEs also comes at a cost. been made when this naïve notion is discarded from the debate. CRE Finance World Winter 2013 18


CRE Finance World, Winter 2013
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