It’s known that a healthy housing market is one of the cornerstones of a strong U.S. economy. That lesson was hammered home more than a decade ago when the Great Recession hit.
Today, while the economy has recovered, the housing market continues to perform far below its potential, and affordability concerns threaten to further constrain the market.
The unsettled housing finance system contributes greatly to the problem. Uncertainty about the system stymies investment, slows the housing market, and presents downside risks to the broader economy.
The Great Recession and slow recovery have made it clear that an overhaul of the nation’s housing finance system is essential. Yet more than 10 years on, Fannie Mae and Freddie Mac still remain in conservatorship. While some steps have been taken to address weaknesses in the mortgage market, there has been no meaningful progress in implementing comprehensive reforms to the housing finance system to ensure that housing credit is available, affordable, and delivered though a sound, competitive system.
Both the White House and Congress are making housing finance reform a top priority. President Donald Trump has directed federal agencies to develop a plan that identifies the appropriate future role of every component of the current housing finance system, with specific instruction to preserve the 30-year fixed-rate mortgage. Meanwhile, Senate Banking Committee Chairman Mike Crapo has created a housing finance reform outline that will help spur enactment of a comprehensive reform measure.
The key to an effective secondary market system for conventional mortgages is a limited federal backstop for catastrophic circumstances. History shows the limitations of the private mortgage market. During bad times, private mortgage credit has fled the market, leaving government-supported mortgage loans as the primary or only option for qualified buyers. And in the aftermath of the downturn, investors have been reluctant to invest in mortgage securities without government backing.
Although some people advocate privatizing the mortgage market to get taxpayers off the hook for possible future bailouts, that is not a viable option. Privatization won’t prevent a taxpayer bailout, and it virtually assures that one will eventually be necessary.
Moreover, federal support is important to ensure that affordable 30-year fixed-rate mortgages continue to be readily available to home buyers. These mortgages have enabled millions of American families to build wealth and financial security through homeownership and must continue to play that role. Any housing finance reform effort must also boost affordable rental housing opportunities and ensure that financing for the construction of new multifamily housing remains available.
Previous attempts at such reform have failed, but it appears the time is now. NAHB urges Congress to pass bipartisan housing finance legislation that would reform the current system and provide certainty to the marketplace, while maintaining an appropriate level of government support for housing in all economic and financial conditions.