Whether by design or by happenstance, the comments by the banking, housing, and economic experts on HUD Secretary Shaun Donovan’s panel during Tuesday’s “Conference on the Future of Housing Finance” demonstrated just how complex the American housing finance system has become—and how challenging it a job it will be to effectively reform it.
In the fiscal responsibility corner sat Mark Zandi, the longtime housing bear and chief economist at Moody’s Economy.com, who in the last year or so has softened his housing stance—to a point. “I think it’s clear that the government should continue to play a large role in the housing market,” Zandi said, asserting that the involvement of the Federal Housing Administration (FHA) during the lending crisis mitigated the severity of the housing downturn and recession. But there was a caveat: “I also think that the government’s role in housing needs to be pulled back quite significantly not only to where it is today, but also to where it was prior to the crisis. … The housing market in my view is over-subsidized … and we are not getting our money’s worth.”
Money currently being directed to housing should be instead allocated to “more productive” areas such as technology or education, Zandi asserted, particularly given the growing federal deficit. “Frankly, we can no longer afford it,” he said of the government’s long-generous support for housing.
His argument resonated with the affordable housing panelists, but only to a point. For Michael Stegman, who serves as director of housing and policy at the John D. and Catherine T. MacArthur Foundation, and Ellen Seidman, executive vice president for mission and strategy at ShoreBank Corp., both based in Chicago, a key issue was the federal government’s outsized spending on homeownership versus rental housing.
“The federal government spends $4 supporting homeowners for every $1 it spend in low-income rental housing,” Stegman noted. “And the benefit for homeowners with incomes of $250,000 versus those with incomes between $40,000 and $75,000 is 10 times greater for the higher-income homeowners than the lower-income homeowners.”
During his remarks, Stegman also highlighted the challenges involved in building and preserving affordable rentals. “We have gone from a system of financing low-income rental housing [with federal dollars] to a system of layering rental subsidies, federal spending, and tax credits onto market-rate debt in the most intricate ways possible,” he said. The recent recession has thus put the construction of such properties at risk because corporations (including Fannie Mae and Freddie Mac) who previously purchased those low-income tax credits to offset their tax liability no longer needed or could afford them, which therefore dried up a major and desperately needed source of financing for affordable housing developers.
While a more balanced federal housing policy has certainly been advocated before by countless housing experts, that issue may prove a particularly sticky one in these housing finance reform efforts, as today’s discussion showed.
“I am constantly distressed by this crisis being used as an excuse” to argue for policy decisions that advocate for a lower homeownership rate, declared Lewis Ranieri, the creator of the mortgage-backed security and the current chairman of Ranieri and Company. “It isn’t the borrowers” who are responsible for the falling homeownership rate and rising foreclosures, he said. “I restructure loans every day. I go through the agony [of talking with middle-class families who put everything they had into a house only to lose it] because they were sold something they couldn’t afford.”
“If we’re going to spend money, let’s do a rent-to-own program,” Ranieri continued. “We know that works, and this is a one-in-a-lifetime opportunity to enfranchise” a generation of Americans by taking advantage of the millions of financially distressed or vacant homes currently on the resale or shadow markets. “We did that in Texas” during the Resolution Trust Corporation crisis, and “it was a model we used for two decades.”
“But we aren’t doing that,” Ranieri concluded pointedly. “We’re sitting here and bemoaning our fate and saying ‘Well, poor people need to go to rental housing.’”
The panel’s other speakers included S.A. Ibrahim, CEO of private mortgage insurer Radian Group, and Mike Heid, co-president of Wells Fargo Home Mortgage. Heid, who oversees one of the biggest mortgage lenders in the country, recommended that the system needed to be reformed to clarify the roles and responsibilities of all the participants in the mortgage market, that any government guarantee of Fannie and Freddie or their successors needed to be “made very explicit,” and that lenders need to have an ongoing interest in every loan they write, over the lifetime of the mortgage.
“We simply have to get this right,” Heid said of the housing finance system and any subsequent reform. “It’s just too critical.”
Alison Rice is senior editor, online, at BUILDER magazine.