Reformers Turn Focus to Housing Market, Fannie, Freddie

If only we could identify phase 2....

Today President Obama is expected to sign the Financial Regulatory Reform bill into law, and while there are differing opinions on the possible effectiveness of the bill (personally I feel it is lame political grandstanding, full of sound and fury, signifying nothing), there is one area that is curiously untouched by the legislation, and that is housing financing.  This is odd because certain practices in the mortgage industry undoubtedly contributed/partially caused the economic mess we are in now.

In today’s Washington Post, Zachary Goldfarb writes an article that speculates that the next area of reform the Obama Administration will focus on is the housing market. One illuminating quote from the article:

“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”

Bostic, who has published leading scholarship on homeownership, added that owning a home has a lot of value, but “what we’ve seen in the last four years is that there really is an underside to homeownership.”

The administration’s narrower view of who should own a home and what the government should to do to support them could have major implications for the economy as well as borrowers. Broadly, the administration may wind down some government backing for home loans, but increase the focus on affordable rentals.

The subject of how exactly to reform the housing market has been discussed quite a bit of late.  Patrick Lawler, Chief Economist for the FHFA suggested that we might be wise to follow the Canadian model of mortgage lending, which eschews the long term fixed rate mortgage in favor of shorter-term adjustable mortgages.

None other than the interim head of Housing and Urban Development, Shaun Donovan suggested that Freddie Mac and Fannie Mae’s futures are in question after they were delisted from the New York Stock Exchange after their stock price fell below the minimum threshold for listing.

You may recall that Fannie Mae and Freddie Mac, who were seized by the Federal Government in 2008 in order to stabilize the housing market have been the recipients of $145 billion worth of taxpayer money thus far.  Total costs for the bailout of the mortgage giants run between $400b-$1t dollars.  Just for emphasis: $1,000,000,000,000!  This backdoor bank bailout shows no signs of slowing down any time soon.

So while there is a consensus that something must be done to reform the country’s housing market, there is no consensus whatsoever as to what or how it should be done.

What do you think should be done?  Let us know in the comments section below.