In January, one of my colleagues at the Federal Home Loan Bank of New York received the rare honor of being able to perform at the 57th Presidential Inauguration as a member of the award-winning Brooklyn Tabernacle Choir.
Each member of a choir brings his or her own strengths to the song, but a choir only works when all of its members sing the same song in one voice. This unity is what gives a song its power. It is time for those of us committed to responsible and sustainable housing finance policies to speak in one voice. I believe "Housing America’s Future: New Directions of National Policy" – the report issued by the Bipartisan Policy Center's Housing Commission on February 25 – provides us with the notes we need to give our voice power.
Earlier this year, at the American Securitization Forum's annual trade show, Michael Stegman, counselor to the Secretary of the Treasury, stated that "a more unified voice within the investor and securitization community could help accelerate our collective pace down the path of comprehensive housing finance reform."
In outlining a series of goals for housing finance reform, Stegman noted that Treasury would "seek to enhance the conditions for private capital to serve a greater role in taking on mortgage credit risk." This belief is at the heart of the Housing Commission's report: The current government role in the mortgage market must be decreased and the private sector role must be increased if any housing recovery is to not only be achievable, but sustainable, as well.
Through Fannie Mae, Freddie Mac and the Federal Housing Administration, the government supports more than 90% of single-family mortgages. As part of the needed rebalancing within the mortgage market, the report proposes, over a multi-year period, the winding down and ultimate elimination of Fannie Mae and Freddie Mac. As the report states, "the business model of these government-sponsored enterprises — publicly traded companies with implied government guarantees and other advantages — has failed and should not be repeated."
The report proposes replacing Fannie and Freddie with an independent, wholly-owned, government corporation – the public guarantor. This new guarantor would not buy or sell mortgages or sell mortgage-backed securities. Rather, it would guarantee investors the timely payment of principal and interest on these securities, and would serve only as a catastrophic government guarantee. Under this new model, private capital would once again be the primary source of funding in the mortgage market, a system that benefits consumers, taxpayers and the overall economy.
Let's remember that during the past four decades, the contribution of housing to the national GDP has averaged between 17% and 19%. Even now, despite its challenges, housing still accounts for approximately 15% of GDP. But this diminished contribution is a major reason why the effects of the financial crisis have lingered for so long, why recovery has been so slow and why the Federal Reserve has kept interest rates low.
The Housing Commission strongly believes that, when done right, homeownership can produce powerful economic, social and civic benefits that serve the individual homeowner, the larger community and the nation.
The report calls for a return to the sensible and responsible approach to housing that has been proven over time: solidly underwritten, fixed-rate mortgages with reasonable down payments suited to each individual borrower; loans which have the expectation to be repaid and a system in which homeowners have a reasonable expectation for home value appreciation. This is the type of responsible lending our nation's network of community banks is built on, and it is the type of lending that I see the members of the FHLBNY do every day.
In February, the New York State Department of Financial Services released a study on New York's community banks. In New York, community banks originate 50% of small business loans statewide, as well as 90% of the agricultural loans, while holding only roughly a quarter of the deposits in the state. These numbers reflect just how much communities across New York depend on their local lender. It is the same story in communities and states across the country.
The best way to meet the needs of consumers and communities is to once again have the private sector play the lead role in the housing market, led by responsible local lenders. A durable housing finance system provides access to lenders of all types and sizes, including community banks and credit unions. These local lenders know the communities they serve, and their continued involvement in the mortgage market allows for mortgage credit to reach all communities in a responsible and localized manner. These are goals that Stegman outlined in his comments in January, and these are goals echoed in the Housing Commission's report.
As responsible lenders, we have the rare honor of supporting America's housing market, the backbone of our economy. I encourage you to read the Housing Commission's report. It is a detailed document nearly two years in the making, and reflects the thoughts and ideas of leaders from across the housing spectrum. As policymakers continue to struggle to find an appropriate response to the challenges facing housing and look to the private sector for guidance, I believe that this report can serve as the sheet music to ensure that our voice is one, unified and strong.
Alfred A. DelliBovi serves as the president and CEO of the Federal Home Loan Bank of New York. In December 2011, he was named to the Bipartisan Policy Center's Housing Commission and is a co-author of its February 2013 report.