Housing Finance Debated At NAHB Conference by Steve Viuker
Panelists at the recent NAHB conference were in general agreement that the private sector needs to play a greater role in mortgage financing but that maintaining some level of federal support is essential to ensure stability and liquidity in the mortgage markets.
A dissenting view on this latter point came from Peter Wallison of the American Enterprise Institute, who said that lowering the conforming loan limits of government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac over time will allow the private sector to come in and pick up that business.
“If you simply made those changes and authorized the withdrawal of the GSEs, you would find we would gradually move to a completely private system, which is where I think we should be going,” said Wallison. “Our entire economy is financed by people who take credit risks and there is no reason why housing should be different. To say that people will not take a risk on housing is without any foundation. The reason why is we have created a government-backed world and the only people who will invest in government- backed securities are people who don’t want to take credit risks. They are called interest-rate investors. If you were to eliminate that vehicle, pension funds and instance companies would come into the market and invest in long-term securities such as mortgages.
This response drew a sharp rebuttal from other panelists.
“Private capital by itself will not secure a safe market and most importantly, private capital during a down market is least likely to be there,” said Michael Calhoun, president of the Center for Responsible Lending. “ We are addressing both the loan problem and the system that was in place. We are risk of doing harm. Since 2009, the GSE’s have provided over $6 billion in financing for housing. Wherever you fall on the GSE’s, the last six years would be much grimmer without that financing available. As Senator Corker said, the base of the problem were unsustainable loans that people could not pay unless housing prices went up to unsustainable levels and they couild refinance. Both Dodd-Frank and the CFPB have put the brakes on it.”
“A myth is that housing prices had never fallen until the recent ‘great’ collapse,” said Calhoun. “In the past 20 years, there have been at least two major housing price corrections. They were masked by inflation, but the real values of the houses fell. In the past 40 years, real housing prices have increased with the rate of inflation. They are not windfall investments. And we want credit available; in particular during times of a crisis. And the myth is that private capital will provide that. That has been missing since the crisis began. You don’t need to restructure Fannie and Freddie but to look at the parts that work well.”
“Mike is making a real important point that credit will dry up in the private housing finance market when times get tough,” said Georgetown University Law Professor Adam Levitan. If we do see a private label securitization market, it will be low-level risk-based pricing. There will be individualized risk premiums for every borrower. If you live in California, there will be a different premium than if you live in Arizona or New York. That sounds good. We should be pricing risk and have geographical pricing. However, if anyone thinks there is a bubble in California, credit will flee California. And you’ll end up with more volatility. The GSE’s didn’t have enough capital, made too many risky investments and had the government’s implied guarantee. Those problems apply equally to the private market and describes our banking system.”
“There is a government, taxpayer supported entity that stands up,” said Michael Stegman, counselor to the Secretary of the Treasury for Housing Finance Policy. “We know how much more serious the housing and economic crisis would have been without the FHA stepping up.”
Summed up Levitan: “If we want to encourage private capital to come in, the circumstances have to be stable; if not improving. As we see prices stabilize, there is still a sliver of the market that will come in and take that credit, risk.”