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CRE Finance World, Winter 2013

Guideposts for Federal Housing Policy The realistic solution is to recognize the government involvement “While the top priority of lawmakers on Capitol Hill is likely, that such involvement should be structured in advance, is and should be putting the federal government on and should limit the risk to taxpayers. Such a system would have a fiscally sustainable path — something that would a tiered system that exposes borrowers, originators, securitizers benefit mortgage and housing markets — plans must to that risk; followed by a backstop in the form of a government necessarily be made to undertake needed reforms.” guarantee. It would exploit existing single-family and multifamily technology infrastructure at the GSEs, but eliminate the GSEs as we know them. Separating the Single-Family and Multifamily Reforms mortgage insurers, but may not be enough. Reducing loan limits may Housing finance reform cannot be done in a piecemeal fashion; also be needed to ensure that FHA’s expansion into the broader there are too many moving parts that require coordinated reform to market is only temporary. With the backing of the federal government, ensure an efficiently functioning system. For example, the scope FHA already has a natural advantage in the market that will not of the GSEs cannot be reduced if volume merely shifts to FHA (as shrink dramatically by increasing premiums 10 basis points. we have seen of late). At the same time, reform does not have to consist of a single gargantuan piece of legislation. Indeed, it will Sustained financial losses on loans made throughout the crisis move more quickly if it is reflective of the fundamental differences are expected for years to come. While FHA has come to play an between the role the GSEs play in the traditional single-family important role not only for minority and first-time homebuyers but mortgage market and multifamily mortgage market. now in the broader market, it seems that role will now assuredly come at a cost to taxpayers for the first time in FHA’s history. We Multifamily loans have generally performed quite well with a serious need to rethink both how government encourages homeownership delinquency rate for Fannie Mae and Freddie Mac’s portfolios of among lower income families and the role government will play in less than one percent compared to close to 14% rate for private keeping housing markets afloat during future economic downturns. market participants. With more stringent underwriting and risk Our budget and the housing finance system will be better if we sharing, the GSEs have played an essential role keeping the multifamily can find ways to encourage a robust private market and limit risk mortgage market liquid without burdening taxpayers. In many ways, to taxpayers. the role of the GSEs in the multifamily space stands apart from its role in the single-family space. 1 and Housing Finance: Putting the “Cost” Back in Benefit-Cost,” (October 2012),Holtz-Eakin, Douglas, Cameron Smith & Andrew Winkler, “Regulatory Reform http://americanactionforum.org/sites/default/files/Regulation_and_Housing.pdf As we consider plans for reform, the challenge will be preserving the function of the GSEs in the multifamily space in a new form. The GSEs were profitable when their single-family business sustained Douglas Holtz-Eakin has a distinguished record as an academic, policy adviser, huge losses, and the liquidity needs are far more significant. and strategist. Currently he is the President of the American Action Forum and most recently was a Commissioner on the Congressionally-chartered Financial Crisis Hence it makes sense to proceed with multifamily reforms on a Inquiry Commission. Since 2001, he has served in a variety of important policy separate track, and a sign that reforms are on track will be the of Economic Advisers (where he had also served during 1989-1990 as a Senior Staffpositions. During 2001-2002, he was the Chief Economist of the President’s Council recognition of this fact. Economist). At CEA he helped to formulate policies addressing the 2000–2001 recession and the aftermath of the terrorist attacks of September 11, 2001. From Reform FHA in an Integrated Fashion 2003-2005 he was the 6th Director of the non-partisan Congressional Budget FHA has become a considerable force within the housing finance his tenure, CBO assisted Congress as they addressed numerous policies — notablyOffice, which provides budgetary and policy analysis to the U.S. Congress. During system since the bust of the housing bubble. The number of loans the 2003 tax cuts (JGTRRA), the Medicare prescription drug bill (MMA), and Social insured by the FHA tripled from FY2006 to FY2009 alone. Its Security reform. During 2007 and 2008 he was Director of Domestic and Economic market share grew from less than 5% of mortgage originations Policy for the John McCain presidential campaign. Following the 2008 election during the bubble to about one-third of mortgage originations in Dr. Holtz-Eakin was the President of DHE Consulting, an economic and policy the past couple years. consulting firm providing insight and research to a broad cross-section of clients. Dr. Holtz-Eakin has held positions in several Washington-based think tanks. He was Regardless of whether this expansion of the FHA’s portfolio was Senior Fellow at the Peter G. Peterson Institute for International Economics (2007– necessary, plans must be made to reduce their market share moving 2008), and the Director of the Maurice R. Greenberg Center for Geoeconomic forward and restore the Mutual Mortgage Insurance Fund (MMI Studies and the Paul A. Volcker Chair in International Economics at the Council on Foreign Relations (2006). He has also been a visiting Fellow at the American Enter- Fund) to financial health. With its capital reserve ratio assessed at prise Institute, Heritage Foundation, and American Family Business Foundation. -1.44% in its most recent actuarial report, the MMI Fund has fallen now well below its 2% capital reserve target. of applied economic policy, econometric methods, and entrepreneurship. He beganDr. Holtz-Eakin built an international reputation as a scholar doing research in areas his career at Columbia University in 1985 and moved to Syracuse University from While the dollar volume of FHA single-family mortgage endorsements 1990 to 2001. At Syracuse, he became Trustee Professor of Economics at the in 2012 is slightly below that of 2011, FHA’s exit as a primary player Maxwell School, Chairman of the Department of Economics and Associate Director in housing finance is not at all assured. In fact, dollar volume of the Center for Policy Research. estimates increased each quarter this year. The HUD-announced Dr. Holtz-Eakin serves on the Boards of the Tax Foundation, National Economists increase in FHA premiums is an important part of restoring the Club and Committee for a Responsible Federal Budget, and the Research Advisory MMI Fund to financial health and necessary to bring back private Board of the Center for Economic Development. A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 19


CRE Finance World, Winter 2013
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