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It's Time to Reboot Housing Reform

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During the election, both parties remained surprisingly silent on what exactly they would do to reinvigorate the housing market.  For the current Administration, that may have been a blessing as its policy efforts in housing have been lackluster at best.  

Some signs of an improving housing market have been apparent, but this has less to do with effective policy than with other market-related factors and the passage of time. Attempts to assist struggling homeowners such as the Home Affordable Modification Program have been, by most accounts, of limited success and have undergone multiple reboots.  The government remains completely involved in the secondary mortgage market with Fannie Mae and Freddie Mac exactly where they were in conservatorship in 2008. Vast confusion has permeated mortgage markets waiting for firm guidance from regulators on what constitutes an acceptably underwritten mortgage. And it could be argued that greater emphasis and federal resources have been placed on fighting the last war in housing, namely egregious mortgage products, than in tackling the issues preventing private capital from returning.  

Ironically, the policy having the biggest impact on the housing market is one the Administration cannot take credit for, namely the Federal Reserve's interest rate actions.  Moreover, the only real policy efforts to emerge from the government since the crisis have been those by the Federal Housing Finance Agency.  The fact that their acting Director is not a politician speaks volumes for the results thus far in housing more broadly. 

Now that the Administration has a "do-over" opportunity in housing, what steps ought it take to get housing back on track?

The focus should be a three-pronged approach to financing, servicing and underwriting process reforms, along with legacy asset management in order to address widespread uncertainty hanging over the market. 

The first priority must be to establish the operating framework and infrastructure for a secondary mortgage market supported by private capital.  The FHFA's work on a new securitization platform along with various initiatives to rationalize and align the GSEs' policies sets the right direction, but by itself does not establish the replacement to the housing agencies.  For that to take place, a clear roadmap as to what follows after Fannie and Freddie must be developed, and that must come from the Administration.  The time is now to pick one of the three alternatives laid out in the February 2011 Treasury housing reform plan.

To assure that the structure of the secondary market has economic and operational viability, a panel of housing finance experts representing a cross-section of mortgage market stakeholders should be convened by Treasury and FHFA outlining the type of security, pooling and servicing agreement and federal guarantee if any, among other features of the market. Working with this group, Treasury and FHFA officials need to establish a timetable for winding down the GSEs which includes structuring their operations in a post-conservatorship world. Concurrently, Federal Housing Administration processes and pricing that served a countercyclical role in supporting mortgage financing during and after the crisis must be reworked to facilitate the return of private capital.

At the same time, the Administration should take on an effort to overhaul the credit rating agencies given their significant role in the securitization process.  That no meaningful reform of the ratings process has occurred is a major policy flaw that transcends just the housing market.

Concurrently, another group of experts must be tasked with offering reforms to mortgage servicing including how servicing companies are to be compensated for their work by whatever succeeds the GSEs.  The FHFA has taken the lead on this initiative in soliciting comments for mortgage servicing compensation structures in 2011, but the industry needs resolution of this issue quickly.  The industry anxiously awaits the Consumer Financial Protection Bureau's Qualified Mortgage definitions due out by January 2013. However, this is just the policy down payment for Dodd-Frank's risk retention requirements and associated Qualified Residential Mortgage Rule (not to be confused with QM).  Delays in issuing both sets of requirements have further postponed a return of private capital to the housing market.  Crafting effective policy is always the objective, but the pace of reform in the case of housing has been glacial.

The final prong in rebooting housing reform must be tackling legacy mortgage problems.  It is clear that HAMP, its sister the Home Affordable Refinancing Program and first-time homebuyer tax credits have not had the impact that even the Administration was hoping for.  While there appears to be improvement in the hangover in housing inventories as reported by CoreLogic, the latest figures of 2.3 million units puts the market back to exactly where it was when the President took office.  Moreover, a recent academic study places the impact of HAMP at about one-third the Administration's goal.  By these measures, the Administration has little to cheer about.  Still, there are other avenues that should be explored such as private-public financing arrangements, greater use of shared appreciation mortgages and more aggressive investor tax credits for foreclosures and rental properties.

In making its pitch for another four years the Administration said that it was on the right path but that its work was not done.  For housing, the work in many areas never got started.  Just over four years removed from when the GSEs entered conservatorship, we have no more clarity on the role of government in the future of housing other than it should be far less than it is today.  The Administration needs to use its re-election toward putting together a comprehensive housing reform program that can be its legacy.

Clifford V. Rossi is the Executive-in-Residence and Tyser Teaching Fellow at the Robert H. Smith School of Business at the University of Maryland. 

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Comments (2)
It is certainly true that housing finance reform hasn't yet started. But the sort of regulatory initiatives suggested above are what caused the problem in the first place. Regulators need to get the capital rules right for lenders, including covererd bonds and securities, and set reasonable borrower downpayment requirements. Enforcing legal and regulatory intent as opposed to seeking deep pockets and finding scapegoats would certainly be helpful. Designing the system isn't.
Posted by kvillani | Tuesday, November 13 2012 at 2:29PM ET
Reasonable downpayment requirements are NOT what got the US into this situation. Continuing to proffer this sort of theory despite evidence presented to the contrary is truly unfortunate as serves to begin a dialogue of exclusion.
Posted by Ingrid Beckles | Tuesday, November 13 2012 at 2:59PM ET
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