William C. Dudley, president of the Federal Reserve Bank of New York, in a recent speech to the National Association for Business Economics, identified five factors that have hampered the economic recovery in the U. S.: monetary policy; global economic problems, particularly in Europe; the aging of the American population; the shortcomings of fiscal policymakers and the overhang of mortgage debt.
While coverage of Dudley's speech centered on his courage in arguing that the Fed should have done more in the early days of the crisis, what struck me about his list is that only two factors are really within Congress's control: the overhang of mortgage debt and the shortcomings of fiscal policymakers.
Economists estimate that housing comprises a quarter of the entire economy. Twenty-three percent of the nation's mortgaged homes (around 10.7 million properties) are underwater for more than their current market value, according to Core Logic data. Late stage delinquencies total an additional two million properties and 3.6 million more units are at "immediate serious risk."
Meanwhile of the fifty-five million outstanding mortgages in America, another ten million are likely to default, according to Amherst Securities. And, because of tightening of underwriting standards, the Mortgage Bankers Association estimates that 20% of all current homeowners would no longer qualify for the mortgages they have now.
While hindsight is always 20/20, we in Congress can and should work to reform Fannie and Freddie.
While there have been some small bills that nibbled around the edges of GSE reform, none of these made it out of the House Financial Services Committee, and Republicans in the Senate have flat out refused to act on reform for the past two years.
October marks the fifth year of Fannie and Freddie being placed under conservatorship. They are out of intensive care, but they, along with the Federal Housing Administration, now control over 95% of the mortgage finance market. Prior to 2008, they controlled just over half.
If we can hasten the re-entry of private capital to the mortgage finance market, we will stabilize prices, help put a real floor in place in the housing market, help increase demand and put the sector on the path to growth. And a healthier, more robust market for new and existing homes will ripple throughout the economy.
A realistic fix has to focus on establishing the rules and utilizing the real-world data. It also involves elements that are market-driven, regulatory-driven and legislatively-driven.
- Clarify recourse risk for originators and underwriters, make servicing standards and guidelines visible to all – servicers, borrowers, and investors – and then enforce those responsibilities. No one wants to play unless they know the rules. And these rules are critical for a functioning housing market. The good news is that the Consumer Financial Protection Bureau is already working on mortgage servicing standards designed to address structural deficiencies that existed in the lead up to the financial crisis.
- Help realign supply and demand in the housing market. Regardless of the recent optimistic housing reports, the supply of single-family homes still dramatically exceeds the demand. The glut of houses could reach 6.2 million over the next six years, which would continue to put severe limits on new housing starts.
- Assist existing homeowners. There are millions of homeowners who would like to refinance and take advantage of historically low interest rates, but they don't qualify under the current GSE underwriting standards. In order to accommodate them, we need smart private capital to come back into the market with risk-based pricing. This will require diligent underwriting oversight, so that investors are confident of what they are buying. A broad rent-to-own program would help to contain foreclosures (and the community blight that often follows) and also enable consumers to rebuild their credit over a few years – and perhaps become homeowners once again.