In an environment of heightened partisanship there is at least one policy issue that people across the political spectrum agree on: The current status quo for Fannie Mae and Freddie Mac–the government-sponsored enterprises dedicated to creating and buttressing the market for mortgage-backed securities–needs to be fixed soon.
There is an arithmetic exigency underlying this sentiment: under the terms of the third Amendment to HERA in 2012, the two GSEs will be utterly bereft of capital next year, and will thereafter need Treasury to provide them with such if they are to continue buying, packaging, and reselling mortgages. Such an arrangement is politically untenable and would exacerbate their current problems even if it were.
The larger imperative is that the current mortgage market is broken and dragging the economy down: home building in 2016 was roughly 60% of its pre-financial-crisis levels: To put that number in perspective, new housing starts last year were lower than every other non-recession year prior to the Great Recession since 1966, when there were ⅔ as many households as today.
There are myriad reasons why we’re not building nearly as many houses these days: for instance, new regulations the last eight years have increased the cost of building a new home by roughly 30%–a datum that’s true both for single family homes and multi-unit dwellings.
Other people have pointed to the ever-expanding nimbyism that constrains development in most major metropolitan areas, as well as the apparent reluctance of millennials to follow their forebears and move to the suburbs soon after tying the knot.
But the biggest reason home building lags is simply that getting a mortgage is more difficult than ever before. The private market for mortgage-backed securities all but dried up in the aftermath of the Great Recession, so Fannie and Freddie are the only games in town. If they won’t buy a mortgage–or if there is any possibility that it could declare ex post that mortgage it purchased did not, in fact, meet its exceedingly strict standards and could be returned–a home loan will simply not be made in most instances.
These standards create difficulties in obtaining a mortgage that would be laughable if they didn’t happen to you: My own attempt to get a conforming mortgage has been difficult despite our ability to put a down payment in excess of 50% on a new home. The bank that finally agreed to take our loan–run by a family friend doing me a favor–realized it was a zero-risk investment but confessed that the heartburn they will invariably receive from the regulators may make them come to regret such a thing.
There’s little question that the disintermediation between the mortgage originators and the MBS investors–combined with the implicit government guarantee of GSE debt–created an environment rife with moral hazard where too little care was paid with regard to who obtained a mortgage and on what terms. But our attempt to foreclose the possibility of the previous financial collapse occurring, rather than thinking holistically about how to remedy what was–and remains–a spectacularly flawed financial regulatory apparatus, was a missed opportunity to make our economy more efficient and boost economic growth. Instead, our moribund financial system constrains investment, risk, and entrepreneurship.
The current administration has vowed to fix it, and amongst their numbers are quite a few financial market veterans who understand some of what plagues the system.
Let’s hope they start with Fannie and Freddie.