In the wake of the financial crisis, the credit availability pendulum swung decisively in one direction, leaving many would-be homeowners with no financial options.
Laurie Goodman recently penned a blog for the Urban Institute that brought the severity of the situation into the spotlight, urging that “a near-zero-default environment is clear evidence that we need to open up the credit box and lend to borrowers with less-than-perfect credit.”
She reported that borrowers who took out mortgages in the past five years are better at paying their mortgages than any other group of mortgage borrowers in history, putting real data to talk about the credit box being too tight.
In light of the current situation, the second blog post in the Treasury Department’s series on reforming the housing finance system focuses on the need to preserve access to mortgage credit through the U.S. economy’s ups and downs.
The first blog discussed the need for housing finance reform to provide access to affordable housing for all Americans.
In the coming weeks, the Treasury said it will also address the need to create a level playing field for financial institutions of all sizes and to promote robust regulatory oversight to protect the broader housing system.
Jane Dokko, deputy assistant secretary for Financial Economics, and Sam Valverde, a counselor in the Office of Domestic Finance, start the blog off saying, “A clearly defined government role in the housing finance system is necessary to protect families from this harm. The specific tools can be incorporated across a range of frameworks for housing finance reform. By ensuring access to safe and responsible mortgages in good and bad times, countercyclical policy tools can also help mitigate housing sector weakness during downturns.”
The blog states that the economic security of millions of families would be better served with stronger countercyclical policy tools in the housing finance system. However, the blog cautions that the absence of an explicit government role in a future housing finance system would not prevent the government from supporting the housing market during a downturn.
The blog breaks down how this can be done and details three key features of a reformed housing finance system that would help smooth access to affordable credit in good and bad times:
- A catastrophic mortgage insurance fund (MIF) to provide stability to the secondary market through the economic cycle
- Countercyclical regulatory tools to ensure access to safe and responsible mortgages in good and bad economic times
- Broad-based modification and refinancing authority so that homeowners can readily access lower monthly mortgage payments during a downturn.
The blog intricately breaks down each of these three points, which can be found here. For now, check out a snippet of the first blog point from the Treasury below:
As we noted in our previous issue brief, and as the president articulated in 2013, a reformed housing system must ensure access to safe and affordable mortgages in all economic conditions. A stable supply of affordable mortgage credit to borrowers depends on investors having confidence in the stability of the secondary market. To this end, the administration supports an explicit government guarantee on a defined class of mortgage-backed securities (MBS).
As discussed in our previous brief, these types of securities form the foundation of the secondary mortgage market by providing a source of funds for mortgage lending. Guaranteeing the timely payment of principal and interest on the MBS, the explicit government guarantee would be funded by financial institutions and would act as insurance against catastrophic losses. With this guarantee in place, investors who provide a source of funds for mortgage lending would be assured that the secondary market would continue to function regardless of the state of the economy.