Post from the JCHS of Harvard University
By Michael Stegman
Much of the writing that I will undertake in my fellowship year at the Joint Center for Housing Studies will address the Trump administration’s and Congress’s administrative and legislative efforts to reform the secondary mortgage market, including determining the fate of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which were taken over by the federal government in the midst of the housing market crash in 2008, and where they remain today.
To put the financial crisis in perspective: between the fourth quarter of 2006 and the first quarter of 2009, home prices, which had not declined nationally since the Great Depression, collapsed by nearly a third. By the end of 2009, nearly one in four homeowners owed more on their mortgage than their home was worth. By early 2010, mortgage delinquencies had more than doubled from pre-crisis levels, and nearly one in ten single-family loans was seriously delinquent or in foreclosure. Between the end of 2006 and 2010, over $6 trillion—more than a quarter—of Americans’ housing wealth was lost.
Consistent with a forty-year career of teaching graduate courses in housing finance and public policy, conducting research, and writing, data and evidence will continue to guide my work as a fellow, but based upon nearly five years working in the Obama administration, I will continue to view the opportunities and challenges of housing finance reform through a Democratic lens. As Counselor for Housing Finance Policy to the Secretary of the Treasury, I helped move a bipartisan reform bill (commonly referred to as Johnson-Crapo) out of the Senate Banking Committee in 2014 but failed to garner a large enough bipartisan majority to move it to the floor for a full Senate vote.
Our administration’s view was that the financial crisis revealed multiple systemic flaws in the housing finance market – ranging from poor consumer protections to insufficient oversight of mortgage underwriting, origination, and securitization, poorly aligned incentives among the chain of market participants, and inadequate capital requirements at institutions engaged in mortgage finance. With the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010 overhauling financial regulations and boosting consumer protections, but leaving out the GSEs, and with the failure of Johnson-Crapo, housing finance reform is the last piece of unfinished business from the financial crisis.
Among the biggest stumbling blocks to expanding support for the Senate bill in 2014 was that members on the left and right wings of both caucuses refused to sign on, over deep-seated differences in their respective views about the role of the GSEs (or their potential successors) in expanding access to affordable mortgage financing and funding for subsidized housing. Disagreements are based partly on differing perspectives on the role of the government in housing, but also on whether affordable housing resources raised in the secondary market can be responsibly and effectively deployed to expand the affordable housing supply or if they will lead to an undesirable and inefficient distortion of housing markets.
Lack of bipartisan consensus on access and affordability issues helped derail legislative reform efforts then and remain a considerable hurdle today as a new, more conservative administration and regulatory leadership team are poised to take their shot.
Housing advocates, and others whose principle affordable housing focus might be on protecting HUD programs the Trump administration wants to eliminate or severely curtail, might not be aware of the GSEs’ longstanding obligation to support affordable housing finance. In exchange for their favored government status as private, shareholder-owned companies, the Congressional charters for the two agencies require them “to provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities).”
And, their amended charters include a bevy of statutory affordable housing mandates, some or all of which could be at risk, depending on the direction reform takes, including: developing programs and financing products that can leverage federal, state, and local government housing assistance; helping insured banks meet their obligations under the Community Reinvestment Act (CRA); establishing relationships with nonprofit and for-profit organizations that develop and finance housing with state and local governments, including housing finance agencies; and assisting primary lenders to make mortgage credit available in areas with concentrations of low-income and minority families, and in rural areas.
In 2018 alone, these requirements resulted in Fannie and Freddie’s combined funding of more than 500,000 single family purchase loans and more than 800,000 multifamily units, which helped make these homes and apartments affordable to families with incomes of less than 80 percent of local area median income. Through a statutory assessment on their new books of business, the GSEs also provided more than $376 million in 2018 to two national affordable housing funds dedicated to building and preserving rental housing for very low-income households who are too poor to benefit from the GSEs’ mainstream mortgage activities.
Reflecting its opposition to using the GSEs to support affordable housing, the Trump administration’s proposed FY 2020 budget fails to include revenues from the GSE assessment.
With the administration expected to release its reform plans this summer and begin negotiating with FHFA, and as Congress begins to re-engage, we should not lose sight of how important the enterprises have been to affordable housing. I plan to continue engaging on housing finance reform during my fellowship year, as I have since leaving government in 2016, but through a larger aperture.
Going forward, I will keep in mind that Fannie and Freddie are part of a broader housing finance and policy ecosystem whereby proposed actions and tradeoffs in secondary market policies can not only directly affect the costs and availability of mortgage credit, but also impact the scale and effectiveness of programs and policies outside of the GSEs, including HUD, FHA/Ginnie Mae, and the VA, which support the housing needs of millions of low-income Americans.
Housing finance reform will not be my only focus, however. Another area of interest is the effects of land use and related regulations that create barriers to housing development, especially starter homes and non-luxury rental properties. Supply constraints such as exclusionary zoning and lengthy development approval processes raise development costs and lead to higher rent burdens for working families.
Addressing these challenges principally by expanding the credit box and financial engineering can lead to a race to the bottom, and we don’t want to go back there. With a consensus by left- and right-leaning Democratic and Republican lawmakers that smart regulatory reform makes sense, the challenge is translating this consensus into practical actions, which will be part of my portfolio.
Finally, with the Trump administration proposing massive cuts in HUD’s housing and community development programs, and the Democratic presidential primary season well underway, federal housing policy has finally risen near the top of several candidates’ policy agendas. I also plan to assess candidates’ housing platforms in an effort to identify and help promote innovative and sensible ideas.
With these important policy debates heating up, the next year has the potential to represent a significant turning point in US housing policy. As a fellow of the Joint Center for Housing Studies, I’m looking forward to drawing on my experience as an academic and a policy maker to contribute to these critically important discussions.
Michael Stegman is a senior housing policy fellow at the Milken Institute Center for Financial Markets.