Housing won’t recover unless GSE, housing tax credit changes

BPC Summit: The status quo is only going to make things worse

The housing tax credit should be raised 50%, a balance must be struck between an affordable housing policy and restricting mortgage availability to qualified borrowers, and the GSE status quo cannot hold.

Those are some of the high points and recommendations so far from panel discussions at the Bipartisan Policy Center Housing Commission’s regional forum being held Thursday in Sun Valley, Idaho.

Participants in the BPC forum are hitting on issues like housing finance reform, the future of FHA and the state of rural housing. HousingWire is the media partner for the BPC.

Housing leaders, including Assistant HUD Secretary and FHA Commissioner Carol Galante; Republican Sens. Mike Crapo and James Risch; former Sens. Mel Martinez and Kit Bond, and former Clinton administration HUD Secretary Henry Cisneros, led the discussion on regional housing issues as well as housing finance reform, community lending and the role of small banks and innovations in rural housing.

Martinez, Bond, and Cisneros serve as co-chairs for the BPC’s housing commission.

“While the budget is difficult and there are no easy answers and identifying budget funds is a challenge, affordable housing must be addressed in Washington,” Cisneros told HousingWire. “The BPC needs to be reprioritizing the discussion in Washington so we can focus on those most in need.”

Cisneros said current affordable housing assistance programs are skewed in both scope and effect, shutting out three of four of those in need, while potentially being like a lottery win for the fourth of the four.

“It’s on a first-come, first-served basis and three in four of those who need assistance won’t get any, while those who do can end up getting assistance for life,” Cisneros said. “In addition, we aren’t focusing on those in the most dire need of assistance. We focus in policy on helping those who are zero to 80% below area median wage, but in practice we ignore those 30% or more below median income, which is a real level of poverty and need. This can’t be sustained.”

Cisneros also spoke to one of the big policy recommendations from the BPC, which is raising the housing tax credit by 50%.

“In addition to prioritizing low-income housing assistance, we need to raise the housing tax credit by 50%, in the short term, so these people don’t fall back into poverty and homelessness,” he said. “If you believe as I do that we don’t have a trustworthy regime of housing assistance, then we have to look at this as a fundamental, national problem because it affects all of the economy.”

Separately, Cisneros told HousingWire that U.S. housing will continue to limp along until there is GSE reform.

“We have a real problem with the GSEs. It’s really important to a long-term, sustainable housing recovery and we haven’t seen that,” Cisneros said. “There hasn’t been enough of a recovery – this is not a robust housing sector.”

Crapo, co-author of the comprehensive Johnson-Crapo housing finance reform bill currently languishing in Senate committee, said the status quo can’t hold and even said he believes it’s possible Johnson-Crapo could still advance in this lame duck, pre-mid-term election congressional period.

“It is very much on the table and in focus,” Crapo told HousingWire prior to his panel session. “There are those who want to do nothing. They want to let the whole thing be resolved in the private sector and others wants to see GSE s recapitalized and want explicit government guarantee, though it’s not clear how that would be accomplished.

“Then there are those who want status quo in conservatorship and 100% government control, and to let the government make any decisions it wants to make, and write the rules it wants to write,” the Republican ranking member of the Senate Banking Committee said. “Then there is the approach of Senator Johnson and myself, which at a 30,000-foot level moves most of the financial functions of mortgage and especially the secondary mortgage system into private sector, but have a limited government backstop to provide the stability of the market to assure a thriving mortgage and secondary mortgage market.”

(The full summary on the various GSE reform measures in Congress, provided by the Structured Finance Industry Group, can be read or downloaded here.)

Crapo said the realistic options are either that housing ends up with the status quo, or “something in same zone as Jonson-Crapo.”

“If that’s the case, we need to focus aggressively on educating and engaging to encourage stakeholders,” Crapo said.

He thinks there is support in the Obama Administration for Johnson-Crapo, and thinks if Congress marshaled support around it the White House would engage. However, more free market groups have called Johnson-Crapo the “ObamaCare of housing” and key Senate Democrats have signaled their opposition to Johnson-Crapo.

Martinez told HousingWire after his panel that GSE reform is fundamental to getting the housing market back on its feet.

“QM is settling into a nice place. QRM is still uncertain – but uncertainty in GSE reform is far more troubling for the markets. Sen. Crapo opened the possibility that GSE reform could happen in a lame duck session and he is one of the people at the helm of this,” Martinez said. “The status quo is 100% government guarantee and a very disproportionate section of the market being government paper. Johnson-Craop is a measured approach. Today we have a 100% government role, so Johnson-Crapo is at least less.”

Asked on the spot if GSE reform could happen before the mid-terms, or even before the 2016 presidential election, Martinez was blunt.

“I think very unlikely,” he told HousingWire.

While finding the right balance between restricting credit too much and returning to the days of mortgages being approved because an applicant has a pulse is important, Martinez said the real problem facing housing – especially the challenge for first-time buyers – is better job creation.

“There are several factors such as availability and accessibility of credit, but this really relates to the employment situation. While it improves, the numbers of what people are earning is not what is traditionally seen,” he said. “People can’t save for a down payment or get their FICO score as pristine as lenders would like if they can’t get better jobs.”

Cisneros said credit availability has gotten too tight.

“Between affordable housing goals and tightening lending and mortgage standards, there is no easy answer. We know that the pendulum has swung too far in restrictiveness. We have too many people who ought to be eligible for homeownership and the benefits of homeownership who aren’t because of restrictions on lending. That shuts them out of the benefits of homeownership – it’s the building block of building net worth and assets, and a pathway to the middle class,” Cisneros told HousingWire.

“Yes, we need safeguards, we need good judgment in lending standards on who can afford homeownership, but we are wrong to shut so many out of the path to the middle class with the restrictions and standards we have now,” Cisneros said.

The rising cost of rental housing is a red flag for housing as well, panelists and guests agreed.

“The challenging environment for first-time homebuyers leads to tremendous demand for rental property, and the affordability challenge for rental housing is growing,” Martinez said. “How we can provide more opportunity for affordable housing being built and what is government’s role for that is another big challenge.”

Martinez also said that FHA needs to clarify its rules.

“With the FHA, they need clearer rules of the game – so that financial institutions could play more comfortably in the FHA field,” Martinez said. “They also need to make sure that the fees they are charging are actuarially sound – no way of getting around this even if it raises costs for first-time buyers, because the fees have to be taking into account that a new homebuyer is a little costlier.”

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