Housing finance reformÕ gridlock problem: Affordable housing

What is standing in the way of reform?

The National Housing Conference has been defending the American Home since 1931 when Mary Kingsbury Simkhovitch, a New York City social worker and policy reformer, formed the first nonpartisan, independent coalition of national housing leaders from both public and private sectors. This pioneering advocacy group represented bankers, builders, civic leaders, realtors, labor, designers and residents – quite the unlikely coalition.

With the formation of NHC, the task became a national movement to save the American Home. Later that year, we convened a meeting at the White House for President Herbert Hoover which led to the passage of the Federal Home Loan Bank Act. It was an important start to a multi-pronged approach that ultimately included President Franklin Roosevelt’s Federal Deposit Insurance Corporation, the Federal Housing Administration and the Federal National Mortgage Association. Eight decades later, all of these institutions remain vital parts of our housing finance system and our national economy.

But the eventual successors to the FNMA, government-sponsored enterprises Fannie Mae and Freddie Mac, still await the reforms necessary to move them out of government control – and remove the taxpayer’s responsibility for their functioning. Once again in January of this year, taxpayers were called on to support these entities, not because they were losing money, but because while they are in conservatorship, they were unable to raise the capital necessary to pay for accounting charges against their earnings that were caused by enactment of the tax reform bill that, ironically, will save them billions of dollars in income taxes.

Yet housing finance reform remains the single largest unfinished business of the housing crisis. And the single biggest factor standing in the way of that business is getting agreement on how to ensure that the GSEs serve all Americans, not just the wealthy. Every federal privilege comes with a federal responsibility. The old housing goals failed to appropriately meet this responsibility, often shifting risk to the federal government through the creaming of higher quality loans that could have gone to FHA, while inviting political manipulation by administrations of both parties.

Market aberrations still need to be addressed through a mix of incentives and requirements for the GSEs, as well as an enforceable mechanism to ensure compliance. Otherwise, their release from conservatorship will lead them to seek the highest return on capital which means even less mortgage access for working families who are well-qualified to be homebuyers but can’t get a loan.

In June, the Joint Center for Housing Studies at Harvard University issued its annual report, “State of the Nation’s Housing,” and its findings were disturbing, though not surprising. Housing is not a zero-sum game. Good news for homeowners is not bad news for renters, or vice versa. Unfortunately, the JCHS report had bad news for everyone. The current homeownership rate of 64%, which represents a small increase over recent years, is still the lowest in over a quarter century, and homeownership rates for younger adults and minorities today are even worse. Between 1994 and 2016, black homeownership rates increased by just 0.3% while white homeownership rates rose 2.2%, widening the black-white gap to 29.2%.

Renters are under even greater stress. The Joint Center report found that more than 38 million U.S. households – nearly a third of all households – paid more than 30% of their incomes for housing in 2016. 20.8 million renter households are cost-burdened, and more than half pay over 50% of their income for housing. Think about your own income and having to devote more than half of that to rent and you’ll understand what millions of our fellow Americans are experiencing every day. Not surprisingly, the number of people experiencing homelessness increased in 2017, ending a six-year trend of decreasing homelessness.

Over the next 20 years the aging of my generation – the Baby Boom generation — will grow the senior population by an estimated 30 million people. However, our current rental housing stock is not equipped to address this need. My daughters’ generation, the Millennials, was hit especially hard by the Great Recession, just as they entered independent adulthood. Think about how many of our friends and colleagues continue to support their adult children, at home or through much-needed financial support.

For those Millennials who are within reach of homeownership, it’s important to keep in mind that a parental “loan” is a down payment assistance program funded by inter-generational wealth and unavailable to 90% of Americans. I am grateful I received just this kind of support when I bought my first home, but being born on second base doesn’t mean I get to brag about hitting a double, or question why others are still on first.

Incredibly, there are still some who claim that government support for affordable housing through the Community Reinvestment Act and GSE housing goals caused or worsened the scope of the housing bubble and subsequent crash. This is simply false and is not supported by the facts.

Numerous academic studies as well as the findings of the Financial Crisis Inquiry Commission have concluded that there was no such causation. As the Federal Reserve Bank of St. Louis found in its 2012 report, and further supported by new data in December 2014, “we find no evidence that affordable housing legislation affected the subprime market during the subprime crisis.” While it is plausible that the GSEs may have encouraged subprime lending by purchasing large quantities of private label securities, the St. Louis Fed found, “any role the Enterprises played in the subprime crisis was not due to their affordable housing mandates.”

The challenge comes in how we measure and enforce that public service obligation so that we encourage meaningful market participation and support innovation without encouraging inappropriate risk-taking or market-chilling activities. Congress and HUD, however, should not be arbiters of business behavior. The prudential regulator can prioritize safety and soundness as well as systemic risks to protect the taxpayer from future bailouts.

At NHC, we are committed to working with our members to find a new approach that can break the political gridlock that currently exists. I believe that the framework for affordable housing responsibilities agreed to in the Housing and Economic Recovery Act of 2008 was fundamentally sound though far from perfect. We need to think outside of our long-held policy priorities because they have not worked. Not politically, and quite frankly, not on behalf of the millions of families who need affordable housing.

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