Not too long ago, I posed to you a fairly significant question: Is America’s housing policy at a crossroads? Now may be the perfect time to ask such a question. After spending the better part of a decade reacting to historic levels of market turmoil and regulatory overhaul, our industry seems to have reached a bit of a plateau. Perhaps it’s time to revisit fundamental tenets of a housing policy that has gone unquestioned for decades.
Is it the government’s job to make Americans into homeowners or, at least, make credit more available to them? Is it the government’s job to provide some protection to the key institutions at the core of the financial services industry when their risks go bad? Where is the line between free markets and government interference? And, depending on your answer to those questions, what role should the GSEs and federally chartered entities play in achieving those policy goals?
I’d suggest that the answers to those questions could take our industry and even our economy in multiple, highly-disparate directions. But I thought I’d ask a few friends for their thoughts as well.
Yes, we’re at a crossroads, but…
David Kittle, who is currently vice chairman and president of The Mortgage Collaborative, has been in the mortgage and housing industry more than 40 years, including a successful stint as the chairman of the Mortgage Bankers Association (2009). He has overseen the growth of numerous successful mortgage lenders in good markets and in bad. He had some thought-provoking observations about how we got to this point, and where we’re likely to go next.
First and foremost, Kittle is not a fan of the regulatory climate of the past few years. “It didn’t always take us 45 days or longer to close a loan,” he said. “In fact, if you go back to the late 1970s, the industry standard for time to close would be jaw-dropping compared to that of today. So why can’t we close a loan as quickly as we did in, say, 1978?”
Kittle and I would agree that the answer is the avalanche of additional regulatory and legislative requirements, state and federal, that have been bolted on to the closing requirements of yesteryear.
In fact, Kittle argues that the more we legislate and regulate the housing industry, the more we restrain it, resulting in tighter and tighter credit. “The environment of the past eight years has been nothing short of punitive in the case of the housing industry,” he posited. “We didn’t have a true, comprehensive housing policy…which has been detrimental to growth.”
When it comes to revisiting the foundations of federal housing policy, Kittle started with the basics.
“Is home ownership for everyone? No. It should be an individual choice. Some people are better served by renting. Nor is it the government’s job to promote housing…but it should have some role.”
So, is America at a crossroads in terms of housing policy? Not exactly in Kittle’s opinion. “But we are at a crossroads from an industry perspective.”
Kittle presented several major trends that have impacted the housing and mortgage industry in recent years such as the disappearance of massive refinancing numbers that carried the industry through the 2000s and again from 2012 – 2015; the substantial increase of production costs which finally appears to be driving the industry toward improved automation (e.g. eMortgage) and a major shift from marketing to the Baby Boomers to marketing to a wholly dissimilar generation, the Millennials.
In fact, Kittle believes there are several questions that will determine the direction of the housing industry in the coming months and years.
1.Does the political appetite to reform the GSEs really exist? “The environment is right for reform. I'm hoping that it happens and that we get it right.”
2.How do we reconcile the desire to make housing available to more people when access to credit has been tightened by risk aversion and regulatory pressure?
3.How “free” should our housing markets be? “They’re not free now,” he observed. “We should allow interest rates to settle naturally where they belong. Right now, we still have manipulated interest rates.”
4.“We have a selling problem, and it’s manifesting itself with the Millennials.” Can the industry make the major adaptation necessary to sell to a market which may turn our industry on its head?
5.“As an industry, we’re way too dependent on refinancing.” Once upon a time, this was just one of several cycles. Today, we’re seeing firms struggle in what would previously have been a fairly typical purchase cycle.
Not a historical crossroads, but…
I also spoke with another friend of mine, Michael Bright. Michael is currently the director, Center for Financial Markets Housing Finance, Regulation for the Milken Institute. He’s also worked for PennyMac and BlackRock as well as with U.S. Senator Bob Corker, R-Tenn., and the Office of the Comptroller of the Currency.” I asked him point blank—are we at a crossroads for housing policy? His answer? “I have trouble believing that. I think the American Dream is alive and entrenched in D.C.”
The focus should instead be on what we’ve learned from the landscape-changing events of the past decade, according to Bright. “We’ve learned that exotic loan terms are not the way to improve home ownership, so the real question is ‘how do we make credit more readily available with better economic guardrails?’”
Bright told me that he personally believes there should be some kind of significant GSE reform, perhaps along the lines of the Ginnie Mae model with greater allowance for private competition. But he doesn’t believe we’ll see this for quite some time. “Personally, I see material flaws with chartered enterprises trying to make profit and fulfill housing policy,” he said. “There’s a real need to clearly define the GSEs’ role as a backstop as well as the terms of liquidity. But realistically, any reform will have to be less ambitious and much more politically palatable.”
“It’s intellectually inconsistent to argue that credit is tight and also resist GSE reform,” he told me. “If the market is not serving enough Americans, we should be open to new ideas and reform models.”
The final word
As for me, I do believe that we are, indeed, at a crossroads for housing policy. I further believe that free market advocates (who, at the extreme end, would turn the role of the GSEs over to the private sector almost entirely) and active government supporters (who believe we need even more regulation and legislation to guide the industry) will have to compromise. I believe that a near-total removal of the federal government from housing is untenable, and comes with far too many catastrophic risks. I also believe that, if anything, we need a less aggressive (not non-existent, just less hostile) enforcement posture. The current climate in the housing industry has facilitated tighter credit and constrained free markets. Regardless of the direction we take, the changes could be seismic.
This doesn’t mean that there are only two viable approaches or a choice between two camps into which the industry’s future belongs. But I believe it does mean that we need a few more “bright lines” delineating where the federal government should, and should not, go. I base this on a few fundamental beliefs:
1.The seesaw battle between affordable housing and risk mitigation needs to be addressed. Again, this is not an either-or proposition, which some have made it out to be. However, I can still recall the same Congress-people clamoring for the GSEs to do their part to put more Americans in homes in the early 2000s rising to condemn the industry’s “risky lending practices” only a handful of years later. As a nation, who deserves homeownership and how much help should they receive in that regard?
2.The current state of the GSEs was never intended to be permanent, and the crisis that created it has abated. I’ve written this before—the existing role of the GSEs (as a cash funnel to the U.S. Treasury) is not sustainable. We need some level of GSE reform.
3.The current enforcement climate in the industry is nothing short of hostile. Kittle’s term “punitive” is absolutely on-point. It’s time for the government and the private sector to work together.
Thus, although GSE reform may only be a part of the larger public policy on housing, I believe it’s a lynchpin. We can no longer kick the can down the road. It must be addressed as soon as possible. I’ve laid out my suggestions for a new super-GSE in the past. Like Kittle and Bright, I believe that it’s not incumbent upon the federal government to determine who should and who should not be able to be homeowners. It is, however, within government’s role to ensure that credit is reasonably available. It’s equally important that the federal government play a major role in ensuring that liquidity is reasonably priced. The model I’ve (and others) suggested, executed well, would do so.
Moreover, such an approach would bolster the mortgage-backed securities market. For me, placing the role currently played by the GSEs and Ginnie Mae onto private investors would logically only raise the price of liquidity. The government-sponsored or owned entities are uniquely able to take on far more risk than any private investor would be willing to take. Thus, liquidity remains reasonably priced to stimulate market activity. Additionally, I am a believer in some kind of catastrophic insurance for bond holders. A private insurer would be hard pressed to even be capable of serving that role.
In sum, I strongl––y believe we should allow the markets to behave with a reasonable amount of freedom. It’s not the government’s role to pick favorites. But let’s be sure we have a backstop in place that will allow investors and the marketplace in general to act with confidence. Executed properly, such a policy will allow the housing industry to reach a more natural state of equilibrium, while ensuring that homeownership is a real possibility for many Americans.
I’ve come to realize that the role of the GSE is at the heart of a larger decision—one we haven’t truly debated or considered for years. It may not be palatable or even viable in such a divided political climate. However, as we emerge from one of the greatest economic crises in decades, the pause we’re experiencing as refinance abates and aggressive regulatory enforcement slows may be just the right time for our industry, and our nation, to revisit the American Dream of homeownership. If nothing else, let’s reaffirm what the dream of homeownership should look like and, more importantly, what’s expected from our government to help people attain it.