The Biggest Question Looming Over U.S. Housing Policy

Now that President Obama has pivoted to housing, the GOP’s big challenge is accepting a government role in it.

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President Barack Obama tours the home framing assembly area at Erickson Construction in Chandler, Ariz., Tuesday, Aug. 6, 2013. The president will speak about housing before heading to Los Angeles where he will tape the “The Tonight Show with Jay Leno.”

On Tuesday, President Obama took his traveling medicine show to Phoenix, formerly ground zero in America's great housing collapse. There as elsewhere, housing prices are rising and foreclosures are falling, offering the president a chance to tout the tonic effects of his administration's efforts to throw a lifeline to underwater homeowners and jumpstart the mortgage market.

That Obama delivered a major housing speech at all was significant, since it's not a subject on which he's lavished much presidential attention or political capital. And well into a blazing recovery that has seen home prices jump by double digits nationwide, the president seems late in coming to the party.

The speech highlighted one of President Obama's two signature policy responses to the housing crisis, the Home Affordable Modification Program, or HAMP, and the Home Affordable Refinance Program, or HARP. The two programs that address refinancing and modification of loans that are guaranteed by Fannie Mae and Freddie Mac have had lukewarm success at best, with 3.4 million homeowners accessing the programs, far below the nine million borrowers estimated by the administration. HARP, arguably the more successful of the two, has achieved some momentum, but the sharp recent rise in interest rates could put the kibosh on refinancing.

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President Obama also briefly plugged his controversial choice to run the Federal Housing Finance Agency: Rep. Mel Watt, D-N.C. Republicans have been reluctant to confirm Watt, citing his apparent lack of technical experience and his support for principal reduction programs. These programs would essentially take underwater loans that the government guarantees at the government-sponsored enterprises, and forcibly reduce the principal balance owed so as to have the new balance in line with current values.

The controversy is over timing. Principal reduction may have made sense when housing prices were stuck in the mud, and underwater homeowners otherwise had no hope of getting out from under their debts. But forcing lenders to write down the principal they are owed now works at cross purposes with the administration's professed interest in reducing the government's enormous footprint in the mortgage markets. It's hard to entice private capital back into those markets when, at the same time, you are brandishing the ax of forcible principal reduction over the head of current investors.

On the other hand, it's a good sign that the president addressed the biggest remaining piece of the housing puzzle: what to do with Fannie Mae and Freddie Mac. The White House has mostly been silent on their fate since the Treasury issued an option paper two-and-a-half years ago. In Phoenix, the president proposed to end Fannie and Freddie "as we know them." These four words were casually inserted but are of ginormous importance. This would seemingly give the president some sort of a "reorganization" option for the entities as opposed to an elimination structure to deal with the current state of conservatorship of the two mortgage giants.

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Fannie and Freddie's future is now the biggest remaining question hovering over U.S. housing policy. According to Isaac Boltansky of Compass Point, any actual legislative action isn't expected until 2017, but in the last few months, House and Senate lawmakers have introduced major reform bills. Each calls for a version of "winding down" Fannie and Freddie, replacing them with new structures to support the mortgage market. But they diverge sharply on the question of the government's role.

The GOP House bill, introduced by Rep. Jeb Hensarling, R-Texas, has no government backstop, meaning the government offers no insurance or guarantee on mortgage loans for investors. The bipartisan Senate bill, sponsored by Sens. Mark Warner D-Va. and Bob Corker R-Tenn., has laid out a plan to wind down the entities, while building a new government fund that explicitly insures mortgage loans in a catastrophic loss scenario behind private investors for a fee, similar to the FDIC.

Obama's call for reorganizing Fannie and Freddie substantially moves the focus back to the continued existence of these entities or a similarly functioning organization with explicit government involvement. The irony here, which seems quite lost on House Republicans, is that it will likely take a government guarantee of loans to induce private capital to return to the mortgage market. Otherwise, access to mortgage loans becomes more out of reach for the middle class, the 30-year fixed rate becomes the exception, not the norm, and housing prices see substantial declines.

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The government-sponsored entities, in fact, are the main pillars holding up the housing recovery; getting rid of them could plunge the $10 trillion mortgage market into a crisis that would dwarf the financial meltdown of 2007-2008.

Even self-avowed "Reagan Republicans" know the government has a key role to play in properly functioning mortgage market. Scott Simon, former head of mortgage securities at bond giant PIMCO recently wrote "government guaranteed mortgage backed securities and a strong [government-sponsored entity] are not only ‘good' but necessary."

So the challenge facing the GOP as the President turns his "better late than never" attention to GSE reform is to reduce the government's role from leading to supporting actor, not to banish it altogether.

Jason R. Gold is director of the Progressive Policy Institute's "Rebuilding Middle Class Wealth Project" and senior fellow for financial services policy. Keep up with his work at PPI here and follow him on Twitter at @PPI_JGold.

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