It is time to set a clear direction for the future state of mortgage finance. Despite low rates and stabilizing home prices, it is still too hard to get a mortgage to purchase a home.
Meanwhile, many of today’s renters must spend too much of their income on housing. Nearly five years since Fannie Mae and Freddie Mac went into conservatorship, there is still no plan for how to reform the secondary market.
A fractured Congress has asked whether there is a bipartisan way forward on housing finance reform.
There is. The recent report from the Bipartisan Housing Policy Commission presents shared ideas for creating a system that addresses the weaknesses and preserves the benefits of the secondary market, in a way that protects borrowers, investors and taxpayers.
That is good news, because much of the benefit derived from housing depends on the way in which housing is financed. That is why, since the 1930s, the government has sought to foster a mortgage marketplace that is stable, safe, efficient and affordable. Homeownership has served as a crucial building block of a strong middle-class during the 20th century.
The Bipartisan Policy Center’s housing recommendations are based on a view shared across the political spectrum that homeownership is a desirable option when viable, and that those who do not buy a home ought to have access to affordable, quality rental housing.
More specifically, this group agrees that the 30-year, fixed-rate product is the gold standard for a safe and sustainable mortgage market; that there is a critical need for a reformed multifamily finance system to meet the demand for affordable rental; and that the system must provide access to safe and affordable mortgages for all creditworthy borrowers, including those of low and moderate income.
GOVERNMENT BACKSTOP
Like the BPC’s reform plan, the proposal of the Mortgage Finance Working Group convened by the Center for American Progress is among 18 proposals that call for some explicit government support for the segment of the market traditionally served by the government-sponsored enterprises, while only a few plans propose no government role beyond the Federal Housing Administration. (To view a matrix of the 18 proposals, see here.)
BROAD CONSENSUS
While a couple of outlier proposals still call for withdrawal of all governmental support, we see a very broad consensus emerging for some type of government backstop. It is time to move on from this question because, ironically, until we do so, the government will continue to provide a 100% guarantee for the vast majority of mortgages.
This new system should be guided by five overarching principles:
Liquidity: The system needs to provide a reliable supply of capital to ensure access to mortgage credit for rental and homeownership options, every day and in every community, during all kinds of different economic conditions, through large and small lenders alike.
The capital markets have come to play an essential role in mortgage finance, but as the past decade so stunningly demonstrated, capital markets on their own provide highly inconsistent mortgage liquidity, offering too much credit sometimes and no credit at other times. These extremes can have a devastating impact on the economy and households.
Stability: Private mortgage lending is inherently pro-cyclical. Stability for the market requires sources of countercyclical liquidity during economic downturns. Stability also requires sustainable products and capital requirements that are applied equally.
Transparency: Underwriting and documentation standards must be clear and consistent so consumers, investors and regulators can accurately assess and price risk, and regulators can hold institutions accountable.
Access and affordability: The government guarantees, along with associated regulatory and consumer protections, to confer significant benefits to households who can access
it — and that should include all creditworthy borrowers.
Left to its own devices, the mortgage industry tends to leave creditworthy lower-wealth, lower-income or minority segments underserved. With appropriate incentives and tools, these segments can be well-served.
Consumer protection: Along with regulators such as the Consumer Financial Protection Bureau, any structure supporting the nation’s housing market must share a commitment to ensuring that the system supports the financial health of the consumer.
It’s been five years since Fannie Mae and Freddie Mac were put into conservatorship. We must remain mindful of the urgency and importance of the task ahead.
Let’s come together and set a clear path forward on housing finance.
Editor's note: This is an edited version of Ratcliffe's testimon to the Senate Banking Committee about housing finance reform.
