If we were creating our nation’s housing mortgage regulatory environment from scratch it would not look anything like our current morass, most people would agree. For instance, it is doubtful that anyone would agitate for creating anything akin to Freddie Mac and Fannie Mae, the government-sponsored enterprises that–now almost exclusively–buy, bundle, and resell home mortgages, let alone suggest that the government provide those mortgages an explicit guarantee. Countries without our heavy government footprint in the mortgage market–which includes the mortgage interest deduction as well as a near-universal 30-year mortgage–manage to achieve home ownership rates that exceed our own.
However, we are not starting from scratch, and political constraints preclude getting rid of Fannie Mae and Freddie Mac, so we need to ask what’s the best way to fix the financial scaffolding of the domestic housing market given that Fannie and Freddie–or some iteration thereof–are here to stay.
And for the record it is clear that there is a problem afoot: as I explained earlier this year, new housing starts post-great-recession have been well below historical levels: For instance, 2016 was the post-recession high and it was still below any non-recession year in the last half-century. Part of that decline has to do with a myriad of new regulations boosting the cost of home construction, and another part has to do with the senseless accretion of land regulations in Blue America, but it is also the case that for many it remains more difficult than it should to obtain a mortgage.
The result of these constraints is that in much of America, housing costs constitute a greater proportion of household income than at any other time since World War II, and an increasing share of households spend more than a third of their take home pay on housing costs.
One major cause of the mortgage market morass has been that Fannie and Freddie have little capital at their disposal. The Third Amendment–a 2012 Treasury directive from the Obama Administration mandating that Treasury “sweep” the net worth of the two entities into its coffers each quarter–has left them with insufficient working capital to do what the law tasks them to do. In 2018 they will, in fact, have no capital at all at their disposal unless and until Treasury acts to give them some. What’s more, tax reform has–albeit inadvertently–increased its need for a capital injection.
The hope of those who want a reform of the status quo was that the optics of a Treasury “draw” by the GSEs next year would be a motivating factor for Congress to resolve their status, but it is not clear that will, in fact, light a fire under Congress. There is some manifestation of Congressional dissatisfaction with the current mess-some members of the Senate Banking Committee–on both sides of the aisle–have been discussing some sort of reform, and Rep. Jeb Hensarling–chair of the House Financial Services Committee–has begun working in earnest in an attempt to achieve some sort of bipartisan solution to the GSE limbo.
However, the odds of a substantive bipartisan bill getting through the Senate in the current environment are slim; among other reasons, it is difficult to see Senator Elizabeth Warren agreeing to what would undoubtedly be an unsatisfactory patch when the Democrats could conceivably be in charge of Congress in 12 months and legislate their own solution.
The political gridlock, along the approach of 2018 and the prospect of two GSEs becoming bereft of capital, has prompted Mel Watt, director of the Federal Housing Finance Administration, to announce that the GSES will retain $3 billion of capital to ensure they can keep doing their business.
Given the current gridlock it was a prudent step to take. It will not prevent the need for the GSEs to draw funds from Treasury at some point in 2018, but it will ensure that they can continue doing what they are supposed to do for the foreseeable future.
However, the GSEs need more than this palliative–Congress needs to address the current housing finance crisis in a timely fashion if the housing market is ever going to return to normalcy. Here’s hoping that 2018 results in a reform of our mortgage financing regulatory world that concomitantly reduces government exposure to the vagaries of financial markets while boosting the supply of housing in the U.S.