A monumental opportunity has presented itself as Julian Castro, former mayor of San Antonio, takes over as the new Secretary of Housing and Urban Development and Congress looks ahead on the critical issue of housing finance reform.
After years of tepid growth and false starts, leaders in Washington have the opportunity to give housing finance reform a shot in the arm. This reform is readily achievable even in today’s log-jammed Congress, as there is bipartisan consensus that the most prudent reforms would accomplish three essential goals: appropriately and strategically wind down Fannie Mae and Freddie Mac in a way that strengthens the housing sector, ensure private capital is sustainably attracted to the market, and fairly treat current and future homeowners, taxpayers and investors.
Previous reform efforts have left everyone who knows the importance of getting this right wanting. Most recently, Senate Banking, Housing, and Urban Affairs Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) introduced legislation that would increase the role of taxpayers in housing finance, disadvantage community banks and credit unions verses larger banks, and, incredibly, politicize the mortgage credit markets to an even greater degree.
Moreover, the Johnson-Crapo bill would lock in the federal government’s previous move to seize the gains of private investors. Rather than send a signal to the market to attract the kind of private capital necessary to transition away from the GSEs, this approach, on the contrary would discourage private capital and make taxpayers liable for irresponsible lending. Because mortgages would consequently become more expensive to acquire, the legislation would also seriously impact the ability of many American families to afford a home.
Unsurprisingly, this approach came under fire from all sides of the political spectrum, from Ralph Nader to the Independent Community Bankers Association to the NAACP to 60 Plus. Fortunately, most believe the legislation has stalled, providing a great opportunity to step back and pursue a more thoughtful reform for which there is a great deal of bipartisan consensus.
There is broad agreement that private capital must come back and replace government involvement, but, terminating Fannie and Freddie too hastily or without proper support risks another housing market collapse. To avoid a shock to the economic system that could specifically endanger the market for the 30 year fixed product – a main engine of the housing market and the primary avenue for sustainable homeownership -- and to avoid putting added pressure on a nascent recovery will require a thoughtful approach with an appropriate framework.
It's time leaders in Washington enact federal legislation that responsibly winds down Fannie Mae and Freddie Mac and sets up a new system funded by private capital with a limited government role and strong regulatory oversight.
To get us back on the path towards a strong, financially sound housing market that offers affordability to American borrowers, the government must also send a message to private investors that they will get a return on their investment. When Fannie and Freddie were in grave danger during the housing collapse, the government sought private investment. Once they returned to profitability, the US Treasury went back on the terms of the original agreement and mandated, with the stroke of a pen, that all profits should go to the Treasury, essentially taking the profits of these investors who took a risk hoping for a return. The Johnson-Crapo approach would have codified this theft of property.
The government should abide by the original terms and choices that were promised. Taxpayers must be paid back, in full, with interest and investors must benefit from these profits as well. A system that discourages private investment by changing terms retroactively will only make the job of the new HUD secretary to encourage home ownership and investment more difficult.
There are many lessons to be learned from the crisis of 2008, including the cost of not reforming properly, and while it is often easy to forget those lessons, we cannot afford to this time. By instituting rules that encourage responsible investing and lending, we can preclude the possibility of the kind of speculative and irresponsible investing that got us into the 2008 housing bubble in the first place.
The ultimate goal, however, is fairness. Fairness for investors, fairness for homeowners, and fairness for taxpayers. Working together we can make certain a new housing finance market operates with private capital, with strong yet limited government oversight, and with respect for the rule of law. Under these principles American homeowners the return on investment and stability they have earned.
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