The continuing debate over the future of Fannie Mae and Freddie Mac will look familiar to anyone who has tried unsuccessfully to lose weight: The more legislators agree on the need to slim down the two government services enterprises (GSEs) and reduce their domination of the secondary mortgge market, the larger and more influential they become.
Although operating under government conservatorship since 1998, the GSEs have shouldered much of the burden of government efforts to bolster the struggling housing market. As a result, despite pressure to wean the market from government support, the GSEs currently own or guarantee half of all U.S. mortgages and back about 90 percent of them.
“We are no closer to transitioning Fannie Mae and Freddie Mac off government life support than the day the firms were taken under direct government control in 2008,” Sen. Bob Corker (R-TN), said recently.
Corker introduced the latest in a series of measures (the House has considered 15 of them this year) aimed at reducing that trend. As its name suggests, Corker’s “Residential Mortgage Market Privatization and Standardization Act” aims to privatize the mortgage finance system by reducing the volume of mortgage-backed securities Fannie and Freddie issue gradually, over the next 10 years. Key provisions would also:
- Direct the Federal Housing Finance Agency to develop uniform underwriting standards and uniform guidelines for servicing and pooling arrangements; and
- Create a new electronic mortgage registration system, also overseen by the FHFA.
A House measure, introduced earlier this year by Rep. Scott Garrett, has the same goal (eliminating Fannie and Freddie as lynchpins of the mortgage market) and calls for the same standardization of underwriting, pooling and servicing rules. Garrett’s bill would also repeal the controversial risk-retention provision in the Dodd-Frank financial reform bill, requiring lenders to retain 5 percent of the risk on loans they package and sell to investors.
The Obama Administration has been working on a secondary market reform plan, but has not yet completed it. “As you know, we’ve been a little busy. We had a little crisis in Europe, and we had a little debt limit debate,” Treasury Secretary Tim Geithner responded when asked about the delay at a recent Congressional hearing.
Garrett said the need for reform is urgent and requires speedier action. "Most, if not all, of my colleagues, Republican and Democrats alike, recognize the status quo is unsustainable. The government-sanctioned duopoly of Fannie and Freddie is not only systemically dangerous to our economic security, it's un-American," he said.
Although there is broad agreement that the current GSE model must be changed, there is no consensus on how it should be restructured or on the key question of the role government should play in the housing market. Most Democrats and many Republicans doubt that a completely privatized system will work.
Garrett’s bill addresses that concern to some extent, carving out a continuing role for government, but a very limited one, restricted to providing low income housing.
American voters also appear to be divided on how much support if any, government should provide for home finance. A recent survey by Move, Inc. found that government should expand its role while 42 percent said it should be reduced.
But a large number of the respondents agreed that housing should be a top priority for the next president, tackled in the first 100 days after he or she takes office; nearly 31 percent said the president should focus on helping homeowners avoid foreclosure while more than 26 percent said the priority should be keeping mortgage interest rates low.
Significantly, more than 80 percent agreed that housing is an essential component of the economic recovery, and 70 percent said a candidate’s position on housing policy could sway their votes in the next presidential election. “After four years of living in a housing downturn, American voters clearly want answers and are looking to our elected leaders for solutions,” said Errol Samuelson, chief revenue officer of Move, Inc., said in a press release. “The survey illustrates that candidates who share the concerns of the American people and make housing a top priority will win their confidence,” he added.
GETTING OLDER AND POORER
The ranks of America’s poor are increasing and getting older. Data from the 2010 Census indicate that a record 49 million people, representing 16 percent of the population, were living below the poverty line. The largest increases were among Hispanics, whose poverty rate surpassed that of Blacks for the first time, and older citizens, hit hard by rising medical costs. Using a broader poverty gauge that includes government benefits on the plus sides while counting taxes and medical costs as debits, the analysis found that nearly 16 percent of senior citizens – roughly 1 in 6 – qualified as poor.
While the number of elderly poor has increased, the wealth gap between younger and older Americans has also widened, reflecting in part the devastating impact the prolonged downturn has had on young adults, and the cushion the social safety net has provided older Americans.
Households headed by individuals 65 or older had an average net worth 47 times greater than that of households headed by someone 35 or younger , the Census report indicated. That gap has doubled since 2005 and is about five times what it was 25 years ago. The median network for holder households was $170,494 – more than 40 percent higher than in 1984; the net worth of younger households, by contrast, declined by nearly 68 percent in the same period, to $3,662, according to an analysis by the Pew Research Center.
Reflecting the combined impact of a dismal housing market and soaring student loan debt burden, more than 35 percent of younger households have a net worth of zero or less – nearly double the percentage in that position 25 years ago.
The magnitude of the wealth gap between young and old is “striking,” Harry Holzer, a public policy professor at Georgetown University, told USA Today. “It makes us wonder whether the extraordinary amount of resources we spend on retirees and their health care should be at least partially reallocated to those hurting worse than them.”
HARPING ON REFORM
If at first you don’t succeed, try, try again – and, in the case of the Obama Administration’s beleaguered Home Affordable Refinance Program (HARP), again and again. The Federal Housing Finance Agency (FHFA) has announced another in a continuing series of changes in the program, which has consistently fallen short of goals to help struggling homeowners avoid foreclosure. Administration officials had initially predicted that 5 million borrowers would be able to refinance into lower-rate and more affordable -rate mortgages under HARP; in fact, fewer than 1 million have benefited so far.
The latest revisions target some of the obstacles – mainly refinancing costs and lender liability concerns – responsible for the disappointing results. The key changes include:
- Reducing fees for all borrowers and eliminating some fees for those who select shorter-term mortgages;
- Eliminating the 125 percent loan-to-value ceiling on fixed-rate-mortgages guaranteed by Fannie and Freddie; and
- Waiving some representations and warranties required for loans sold to Fannie and Freddie under HARP.
“Our goal in pursuing these changes is to create refinancing opportunities for these borrowers, while reducing risk for Fannie Mae and Freddie Mac and bringing a measure of stability to housing markets,” Edward DeMarco, acting director of the FHFA, said in announcing the revisions. He estimates that the new standards will double the number of borrowers who will take advantage of HARP.
Industry analysts say those predictions may be overly optimistic, but most agree the changes will be beneficial. "While some potential changes, such as a waiver of reps and warranties on HARP loans, could be meaningful in terms of raising HARP volume sharply, the numbers are still likely to be small relative to the mortgage market as a whole," analysts at Keefe, Bruyette & Woods wrote in a note to clients.
Analysts are CORE Logic agree that the impact will be limited, but still significant. “Time will reveal the true impacts,” they conclude in a recent report, “but it is certain that many more borrowers will benefit than would have otherwise." Barring a steep increase in mortgage rates “which will dampen the impact,” they predict, the revised program could produce a 15 percent increase in refinancing “that would otherwise have been unlikely to happen.”
One thing the revised program won’t do, the report cautions, is deter “strategic default” by underwater borrowers who are current on their mortgages but decide it is in their financial interests to walk away from the loans. Because HARP assistance is limited to borrowers who are behind on their payments, the report notes, “there is little direct and immediate benefit to the impacted housing markets in the near term or to the borrowers who are already delinquent.” The program’s benefits “will be longer term in the form of reduced, new distressed assets."
STILL SAYING NO
The HARP revisions the FHFA has announced (see related item) include many of the changes program critics had urged, with one notable exception: The agency has flatly refused to reduce the principal balance on underwater loans – a step many analysts contend is essential to produce a broad-based and near-term recovery in the housing market.
Edward DeMarco, the FHFA’s interim director, told CSPAN that the agency’s primary job is to strengthen Fannie and Freddie and prevent them from costing taxpayers more money. “FHFA has been aggressively trying to assist the housing market to ensure that the country continues to have a liquid and stable and functioning secondary mortgage market," DeMarco said in an interview with C-SPAN public affairs television that was set to air on Sunday. "[But] some of those things that are being advocated for us to do really go beyond what Congress has given us the authority to do and the funds that have been provided," he insisted, adding, “on a stand-alone basis, principal forgiveness does not accomplish our conservator mandate.”
Critics say DeMarco has defined the agency’s role too narrowly, and, as a result, is not taking steps necessary to end the housing market’s downward spiral.
"FHFA has not acted on its conservatorship mandate to insure that the GSEs act to stabilize the nation's housing market, and taken no account of the reality that the narrow financial interest of the GSEs depends on a national housing recovery," Lawrence Summers, formerly a top economic adviser to President Obama, wrote in a recent op-ed piece for Reuters.
Economist Martin Feldstein, known for his conservative views, agrees. Writing in the New York Times, Feldstein argued that reducing principal “is the only real solution” to the housing market’s problems. Providing additional government aid to homeowners or financial institutions isn’t popular, he acknowledged. “But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.
“I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves,” he continued. “Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods.” And the continued decline in home prices threatens the economy as a whole, Feldstein contends, by “depress[ing] consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.”
As American consumers continue tightening their belts in the face of continued economic weakness and stagnant income growth and employment concerns, the mortgage interest deduction appears to be among the things they have decided they can do without. In a recent poll conducted by Bloomberg News, 48 percent of the respondents said they would be willing to give up all tax deductions, including the one for home mortgage interests, in exchange for lowering tax rates across-the-board; 45 percent opposed the idea. When the same question was posed a year ago, 51 percent opposed eliminating the deduction and only 41 percent favored it. A USA Today poll conducted in April of this year found that more than 60 percent of respondents opposed eliminating the tax break for home ownership.
Richard Green director of the Lusk Center for Real Estate at the University of Southern California, said the shift in consumer sentiment reflects growing concern about taming the federal deficit. “Everything is on the table,” he told Bloomberg. "People are so desperate to figure something out that they're willing to consider anything."
Housing industry executives and many industry economists warn that the interest deduction is an essential component of the nation’s home finance structure; eliminating it would undercut future demand and “decimate” home values.
One study predicted that home prices would fall by from 2 percent to as much as 13 percent, with the greatest impact in areas with the highest home prices. San Francisco, for example, “would just get whacked,” Green said.
Recent opinion polls notwithstanding, support for the deduction – especially by higher income taxpayers who benefit most from it – remains strong, and eliminating it will not be politically popular. That’s one reason proposals to replace the deduction with a tax credit – supported by two different advisory commissions (one appointed by President Obama, the other by his predecessor, George W. Bush) haven’t garnered much public support from lawmakers.
Ending the break is difficult, Green told Bloomberg, because “the cots are widespread and barely noticed, while the benefits are concentrated in a vocal minority” that strongly supports the status quo. “It’s only in the context of overall reform that you might see something happen,” he said.