Sheila Bair, the outspoken and decisive head of the Federal Deposit Insurance Commission (FDIC), offered her prescription for healing the American housing market for the long-term Tuesday.

“Even as we grapple with today’s problems, we must look to the future,” Bair told attendees at the annual meeting of the Reston, Va.-based Housing Association of Nonprofit Developers (HAND) in suburban Virginia. “What will it take to assure that future housing cycles do not breed the kind of instability we have seen in this episode?”

In her speech, Bair recommended the following:

  1. Educate and protect the consumer. “Somewhere along the line, the industry forgot that the ultimate purpose of mortgage finance is to meet the credit needs of the American people,” said Bair, arguing for simplicity in such arrangements. “Most consumers are not Wall Street financial wizards. They want simple mortgage structures and straightforward disclosures that are designed to clarify—not obscure—the true nature of the deal. When consumers lack a clear understanding of the deal,” she added, “they are more likely to default, as so many consumers have in this crisis who had subprime and nontraditional loans.” (The House and Senate are currently working on a financial overhaul bill that would cover mortgages, among other financial products.)

  2. Reestablish the secondary mortgage market with more transparency, more thorough lending and underwriting standards, and new loan origination practices that require originators to “keep some skin in the game and not be able to walk away from the long-term consequences of their decisions,” she said.  The issue is a difficult one. “Securitization and the complex financial instruments that surround it have been vilified, rightly in many cases, for triggering the recent crises,” Bair said. “But in today’s world of global finance, securitization remains the best way to tap large volumes of capital at the lowest possible cost.”

  3. Examine and perhaps revise federal housing policy, which overwhelmingly supports homeownership with mortgage interest deductions and more. “Even as we emerge from this crisis, it is worth asking whether federal policy is devoting sufficient emphasis to the expansion of quality, affordable rental housing,” Bair said. “The taxpayer subsidies for homeowners are about three times the size of all rental subsidies and tax incentives combined. … I think we need a better balance. Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.”

She urged the attendees, who are involved in developing, building, managing, and financing affordable housing in the mid-Atlantic, to keep these considerations in mind even as the economy improves. “As better times come back to the U.S. housing and mortgage markets, we cannot forget the lessons of this crisis,” she said. “And we must resist the temptation to cut corners or lower our guard.”
Finally, Bair briefly mentioned the banking industry and its slowly improving health, although she acknowledged that “bank failures continue at an elevated pace.”

That’s bad news for builders seeking financing, given the source of these failures. “While some of the early bank failures in this crisis included large mortgage lenders that offered risky loan products, we are now dealing with problems among smaller community banks with high concentrations of construction and commercial real estate loans,” Bair said.

Alison Rice is senior editor, online, at BUILDER magazine.

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