One of the best parts about living in a democracy is being an armchair legislator. If I were in Congress, I would have voted for the historic housing bill. Even though it isn’t likely to end the housing downturn, and it forced several major compromises, the bill was a logical response to a housing downturn that has already wiped out a ton of wealth in this country.
The bill is as good for what it didn’t contain as for what it did contain. The net operating loss carry-back provision, for instance, that was included in early versions didn’t make it into the final bill. It would have disproportionately aided the biggest home building companies, who are already benefiting from accounting provisions that allow them to take paper losses on land. Why should this playing field be tilted any further?
The biggest early impact from the law came from the deletion of down-payment assistance (DPA) programs on FHA-insured mortgages. Many builders had resorted to heavily using these programs in recent months as they pursued cash-strapped first-time buyers. Others stayed away because the FHA and the IRS had been trying to stop their use. The FHA argues that default rates are three times higher on FHA-insured mortgages with DPA.
The loss of these programs seems like the price industry was asked to pay for the new $7,500 tax credit for first-time buyers. There was no way legislators were going to leave in both. Except through September, of course, when buyers can double-dip. That might be enough to kick-start some sputtering markets.
Given the entropy in Congress in recent years, it seems almost incredible that lawmakers could act so quickly to shore up Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) may seem far removed from the day-to-day reality faced by builders, but they are absolutely critical to the housing finance system—in the early part of the year they were buying 70 percent of mortgages written in this country. Without them, there would have really been a liquidity crisis.
Clearly, the home building industry—and everyone’s prospects within it—are intimately tied to the nation’s mortgage delivery system. When stock prices at Fannie and Freddie went into a free fall this summer, this was a major crisis in the making. The new housing bill gives the Treasury Department the authority to step in and save the GSEs with loans or stock purchases.
Moreover, if you’re going to make it all but official that the GSEs are more like federal agencies with direct ties to federal coffers, then maybe some of their profits should be used for a good public policy purpose, such as helping the people who were really left behind during the housing boom. That was the thinking behind the creation of a new rental construction program for low- and very low–income households. Money for the program, which could fund up to $800,000 in projects starting in 2010, comes from profits at Fannie Mae and Freddie Mac.
Congress also resisted the temptation to bail out every homeowner and lender facing financial crisis. Only people in danger of foreclosure who are spending at least 31 percent of their gross monthly income on mortgage debt qualify for the FHA refinancing program. It’s pretty early in the game, but lenders might well go for this program over a short sale or a foreclosure.
The decision to raise the limits on the mortgages that the GSEs can buy and the FHA can insure in high-cost areas was long overdue. Plus, without this change, it’s hard to imagine that the bill would have done much to help some of the hardest-pressed and most-expensive housing markets.
It’s too bad that it takes a crisis to get reform in the nation’s housing policy, but that’s the way it always seems to work. Already, some pundits are speculating that the new incentives may cause another boom. This seems unlikely. Given the sunset dates for many of the major provisions—the new tax credit is only good through June, the down-payment assistance programs are going away, the Treasury’s line of credit with the GSEs is only good for a couple years—the law seems like a carefully measured response.