The next four years, for better or worse, will be critical for the housing industry. A complete overhaul of the mortgage finance system could be imminent. Rules and regulations on everything from lending and consumer protection to land use could be rewritten. Tax laws that favor homeownership and residential development, or impact low-income and multifamily housing, could be put to a severe test.
“The stakes couldn’t be higher,” says Ken Gear, executive director for the Washington, D.C.–based Leading Builders of America, which represents 20 of the industry’s largest public and private builders.
The next president of the United States can influence those outcomes through agency appointments, policy pronouncements, and by using his office as a bully pulpit. “Housing is one of the few levers the president can actually move through policy,” says Ethan Handelman, the National Housing Conference’s vice president for policy and advocacy. “So it makes a difference who gets elected.”
But Handelman and other housing industry executives have been watching, with dismay, as neither President Barack Obama nor his opponent, former Massachusetts Gov. Mitt Romney, has shown much inclination toward leading when it comes to housing, or for that matter making housing central to their election strategy.
In America’s polarized political environment, modern presidential campaigns are exercises in risk management. Obama and Romney must appeal to as many voters as possible, including those whose agendas are farther afield than the candidates’ themselves are, for example, on the government’s backstopping of mortgages or its role in foreclosure prevention. So while repairing housing and mortgage finance may be, in Handelman’s words, “the single biggest economic issue after employment,” the candidates seem to have calculated that these issues won’t be differentiators for enough voters, so why rock the boat?
“It’s a difficult issue to explain politically,” says Kent Colton, the former NAHB chief executive who is president of Washington-based Colton Housing Group. Nevertheless, Colton—a Romney supporter—thinks both candidates are making a mistake by not talking about housing at a time when even the most qualified home buyers are struggling to obtain mortgages.
Some housing executives have concluded that Obama and Romney would like nothing better than to sweep housing’s myriad problems under the rug during this campaign. “But they don’t have the luxury of doing that because the mortgage finance system is almost entirely government run,” says the NAHB’s current CEO Jerry Howard. He notes, though, that “the devil’s in the details” when it comes to determining how the next president might help or hinder housing. On that score, the jury is still out.
Trying to Erase the Past
Last spring, a poll of 400 Realtors in 10 states found that 57 percent of them favor Romney. That choice, though, seemed more about blaming Obama for the still-weak housing and real estate markets than embracing Romney, who had yet to make public any policy statements about how he would revitalize the housing sector.
As governor, Romney supported affordable housing and smart-growth initiatives. But he’s moved away from his moderate past toward the Republican Party’s more conservative base. So far, Romney has confined his thoughts about housing and mortgage finance (at least through August) to a few off-the-cuff remarks—such as closing down HUD or eliminating the mortgage interest deduction for second homes—that several housing officials claim they don’t take seriously. “We want to know more about where he would take us as a nation in housing and urban development,” says John Bohm, senior director of congressional relations for the National Association of Housing and Redevelopment Officials.
The Obama administration, on the other hand, must defend a track record for “fixing” housing that has fallen well short of its own goals. At least one Obama supporter—Richard Green, director of the Lusk Center for Real Estate at the University of Southern California—is bewildered by the president’s “reluctance” to be an activist for borrowers. But he’s buoyed by the government’s HARP 2.0 Refinance Program that went into effect in March, which paves the way for homeowners underwater on conforming, conventional mortgages to refinance without paying down principal or paying mortgage insurance. HUD has introduced more generous incentives to get banks and the government-sponsored enterprises (GSEs) to modify more loans by reducing principal, an option that has been rejected by Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), the GSEs’ overseer.
Keeping Credit Flowing
Obama and Romney seem to be on roughly the same page when it comes to mortgage finance reform: that the use of taxpayer dollars to insure residential loans needs to be vastly scaled back, and lending (along with its risks) needs to be placed more in the hands of the private sector. What separates the candidates is where they see government’s future role in this scenario.
“Credit is the lifeblood of housing, so that the extent to which the president and administration have control over it in any way, what they do makes a big difference to home builders and housing,” says Eric Belsky, managing director for the Joint Center for Housing Studies at Harvard University. Belsky notes that the president “has a lot of say” about FHA and the policies it pursues. (FHA last year accounted for two-thirds of loans to buyers with incomes at 80 percent or less of their market’s median.) And HUD reports to the president, who also appoints FHFA’s director.
In its “Report to Congress” in February 2011, the Obama administration proposed three options for long-term housing finance reform: a privatized system with a government insurance role limited to FHA, USDA, and the Department of Veterans’ Affairs’ assistance for narrowly targeted borrower groups; a similar system that would recalibrate during times of crisis; and a privatized system with these agencies providing assistance to low- and moderate-income borrowers, as well as catastrophic reinsurance behind significant private capital.
However, Obama himself has yet to identify which option he favors. (Colton speculates that the catastrophic option will be what Obama or Romney ultimately embraces.) Colton adds that Obama has failed to push the GSEs to provide clarity about the circumstances and time frames under which they’d “put back” loans to banks. Consequently, banks have all but stopped lending, which, in turn, has stunted demand for and construction of new homes.
It’s still anyone’s guess what Romney has in mind to replace Fannie and Freddie with once they’ve been wound down. But he may have painted himself into a corner by reaching out to Tea Party supporters who disdain all government-backed bailouts and would probably reject any plan that hinted at more taxpayer money being used to prop up lenders or borrowers.
“The whole housing finance issue has become the third rail for conservatives, who don’t want to hear anything but ‘blow it up,’” says Gear. “The people in the Romney camp we’ve spoken with understand the problems of blowing it up, and they are trying to figure out how to walk that fine line” with these constituents.
The next president must also deal with the foreclosure mess, “which is only about halfway done,” says Handelman. Obama’s record has been spotty, to say the least, but Howard thinks the administration has spent too much time focusing on foreclosures “which for 39 states aren’t an issue” and not enough time helping to free up capital for lending to home buyers and builders.
Romney said last year that he would have let the foreclosure process “run its course and hit bottom” without moratoriums or government intervention. Less noticed in that same speech was Romney’s statement that “helping people refinance homes to stay in them is one [idea] that’s worth further consideration.” But he didn’t offer any suggestions for how to pay for that assistance.
Low-Income Housing Submerged
It’s not like either candidate is short of ideas to draw on to come up with a solution to this problem. Writing in The New York Times on Aug. 13, economists Mark Zandi and Joseph Stiglitz asserted that Washington needs new ways to facilitate “mass mortgage refinancings.” They endorsed a plan by Oregon Sen. Jeff Merkley where underwater homeowners current on their mortgage payments could refinance (at a rate 2 percentage points higher than Treasury rates) to either lower their monthly payments or pay down their loans and rebuild equity. A government-financed trust would buy those mortgages for three years, after which it would wind down as owners paid off their debt.
According to Howard, nothing is likely to happen in housing finance reform or foreclosure relief until after the elections. But that hasn’t dampened the NAHB’s activism. This summer the trade group conducted “Rallies for Homeownership” in key swing markets, and was a major presence at the parties’ conventions. The NAHB’s intention, Howard told Builder in June, was to pressure each candidate to state for the record his positions on housing as a national priority.
Other housing executives are even more specific about what the next president’s housing-related agenda should be.
The Leading Builders of America has made a series of recommendations that don’t necessarily involve Congress, such as limiting the impact of foreclosures and short sales on a dysfunctional appraisal process. Gear and others point out that the president can influence the new rules for qualified mortgages and qualified residential mortgages that are being written by agencies that report directly to the White House.
Handelman wants more attention paid to credit access to relieve the “unprecedented restrictions” on home buying borrowers and to stimulate construction of multifamily and rental properties whose supply shortages have caused rents to skyrocket.
Both Green and Bohm lament that crisis-level shortages of low-income housing haven’t surfaced as a campaign issue. But to those who argue the country simply can’t afford to support public housing as it has in the past, Bohm responds, “I would turn this around and say we can’t not afford to do something and still claim we’re a nation that cares for its citizens.”
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