The Credit Crisis of 2008 took many Americans by surprise, and has caused expanded suffering. The economy has since experienced a great recession. Our government has been criticized for contributing to this crisis, mainly, by insufficient and outdated regulatory processes. There are several fundamental defects in the American Housing Finance Market, and, at this point, we can look back and reflect on what happened and speculate the causes. The next step is to come up with a plan to fix the inherent problems in our current housing finance market, and prevent future economic suffering.
The primary defects in the housing finance market include a breakdown of regulatory policies over predatory lending practices, securitization practices, and Fannie Mae and Freddie Mac. As a result of these unregulated and greedy lending practices that led to risky investments, there was insufficient capital in the financial system to absorb the substantial losses, and the industry was not prepared to handle what happened next.
In response to the crisis, congress and the Obama Administration put in place several policies to help stabilize the housing market. These policies include a tax credit for first time homebuyers, support to government housing agencies, programs for neighborhood stabilization, programs for community development, and support for mortgage credit through FHA. Our government officials also intended to provide support for struggling homeowners by initiating home loan modification, refinance, and counseling programs. In order to strengthen consumer protection, congress passed the Dodd-Frank Act in July of 2010 which was intended to promote financial stability by improving accountability and transparency in our financial system. Fannie Mae and Freddie Mac have taken action to increase their guarantee fees and their pricing. In addition, FHA has increased their insurance premiums in an effort enhance their reserves and assist private capital’s return to the housing market. Lastly, they have enhanced their underwriting requirements.
In a report presented to congress in February, the U.S Department of Housing and Urban Development along with the Department of Treasury outlined the administrations reform plans. These plans include:
1. Reducing government support for housing finance by slowly decreasing their involvement with Fannie Mae and Freddie Mac. They also recommend that these organizations increase guarantee fees to help more private capital flow through the financial system, reduce loan limits, and diminish their investment portfolio. The goal of this plan is geared to responsibly encourage private capital being the primary source of financing for housing needs.
2. “Address fundamental flaws in the mortgage market to protect borrowers, help ensure transparency for investors, and increase the role of private capital.” The administration’s efforts will be geared toward:
• "Curbing abusive practices;
• Promoting choice and clarity;
• Stronger underwriting standards, including requiring lenders to verify ability to pay;
• Requiring originators and securitizes to retain risk;
• Improving access to information among all market participants; [and]
• Strengthen transparency and disclosure in credit rating agencies’ analysis.”
3. Supporting efforts to allow citizens to have access to affordable housing. The administration stresses that these efforts are not directed only at increasing financially responsible homeownership, but increasing affordability for those who rent as well.
4. Reforming and Strengthening FHA. The administration does not want FHA to expand during normal economic times because they recognize that as FHA loan's market shares increase, the value becomes unsustainable. The reform and strengthening plan will ensure that FHA manages its risk more effectively and is able to respond to stress in the housing market.
* The entire report to congress is available on hud.gov
Shaun Donovan, Secretary of the U.S. Housing and Urban Development commented on the administration’s plan by issuing a statement, “this report provides a strong plan to fix the fundamental flaws in the mortgage market and better target the government's support for affordable homeownership and rental housing. We must continue to take the necessary steps to ensure that Americans have access to quality housing they can afford. This involves rebalancing our housing priorities to support a range of affordable options, from promoting much-needed financing for quality, affordable rental homes to ensuring the availability of safe, and sustainable mortgage products for current and future homeowners." Lastly, there is not significant criticism to this plan as most agree that reform is going to be necessary to stabilize and maintain the housing finance market. The republicans in congress have put forth guidelines that, for the most part, parallel to the current administration’s ideas. These guidelines include:
1. No more bailouts,
2. Taxpayer protection,
3. Restoring market discipline,
4. Monitoring systematic risk,
5. Consumer protection,
6. Ensuring transparency, and
7. Streamlining government.
The time has passed for pointing fingers on who is to blame for the housing crisis. Damage control efforts have been made, and it is now time to make preparations for reform. Several ideas have been presented to congress. Ultimately, the steps that our leaders take today to reform the housing finance market will improve the integrity of the financial housing market, consumer confidence, and finally our economy.
1. “FHA Takes Steps to Bolster Capital Reserves.” U.S. Department of Housing and Urban Development. Press Release: February 14, 2011
3. “Obama Administration Plan Provides Path Forward For Reforming America's Housing Finance Market, Winding Down Fannie Mae And Freddie Mac” U.S. Department of Housing and Urban Development. Press Release: February 11, 2011
4. “Reforming America’s Housing Finance Market: A Report to Congress.” The Department of the Treasury and U.S .Department of Housing and Urban Development. February 2011