H.R. 3068, TARP for Main Street Act of 2009

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Chairman Frank, Ranking Member Bachus, and distinguished membersof the Committee, I thank you for the invitation to appear attoday's important hearing. I am Mark Calabria, Director ofFinancial Regulation Studies at the Cato Institute, a nonprofit,non-partisan public policy research institute located here inWashington. Before I begin my testimony, I would like to make clearthat my comments are solely my own and do not represent anyofficial policy positions of the Cato Institute. In addition,outside of my interest as a citizen and a taxpayer, I have nodirect financial interest in HR 3068, nor do I represent anyentities that do.

The first point of my testimony is that despite the repayment ofTARP funds from a number of banks, and the receipt so far of over$6.2 billion in dividends from TARP institutions, the TARP overallhas not been profitable. CBO's most recent estimate, released onJune 17th, is that the overall subsidy cost of the TARP will be$356 billion. To be very clear, this is $356 billion of loss to thetaxpayer that will not be recovered. I know of no creditableforecaster or auditor that is projecting profits for the TARPprogram.

In addition to the $356 billion in losses from the TARP, we arealso likely to see between $200 billion and $300 billion inabsolute losses from the bailout of Fannie Mae and Freddie Mac. Wemay also see losses in the tens of billions from the FederalReserve mortgage backed securities purchase program.

So we are likely to see ultimate taxpayer losses from thevarious bailouts approach $700 billion. While any dividendsreceived will make only a small dent in those losses; divertingthose dividends for purposes other than off-setting TARP losseswill only leave the taxpayer with a larger hole to fill.

If however, Congress chooses to use TARP dividends, or any otherfunds, to support the housing market, I believe Congress shouldfocus on stimulating the demand side of the housing market, ratherthan the supply side. The fundamental problem facing our nation'shousing markets is an oversupply, a "glut", of housing, rather thanany lack of housing.

The nation's oversupply of housing is usefully and carefullydocumented in the Census Bureau's Housing Vacancy Survey. TheCensus reports a national rental vacancy rate for the first quarterof 2009 at 10.1 percent. This is only slightly below the historicrecord rental vacancy rate of 10.4 percent, and is almost 40percent higher than the average vacancy rate for the last 50 yearsof 7.2 percent.

The record rental vacancy rates are not simply an issue ofspecific geographic areas, but are found almost throughout thecountry. In fact, the highest rental vacancy rates, and also theareas seeing the largest increases in rental vacancies are in ournation's central cities. In fact, all the increase in vacancy ratesover the last year can be attributed to the increase in centralcity vacancies. Rental vacancies in suburban and rural areas, whilestill near historic highs, have moderated over the last year andremain below that of central cities. The primary importance of thisfact relates to the tendency of our federal housing productionprograms to concentrate new housing production and rehabilitationin the central cities.

Even in parts of the country with traditionally tight rentalmarkets, such as California, which while remaining tighter than thenation overall, have seen increases in rental vacancy rates overthe last year. Since the bursting of the housing bubble in 2006,we've seen rental vacancy rates increase in California by over 10percent. Few states, however, have witnessed the increase seen inFlorida, where rental vacancy rates have jumped by over 60 percentsince the bursting of the housing bubble. Of course, some states,particularly those where the housing bubble had little impact onprices, such as Ohio and Michigan, have not seen major increases inrental vacancies, but still have rates considerably higher than thenational average. Interestingly, the states with the lowest vacancyrates are Vermont and Wyoming, and are concentrated in rural areas,those very areas where our federal production programs have beenleast effective.

Our federal production programs also tend to build almostexclusively multifamily properties, as would likely be the casewith a production-focused trust fund. However, over two-thirds ofvacant rental units are currently in multifamily properties. Thisfact is not simply the result of older units based in older urbanareas. The rental vacancy rate for units constructed in the 2000sis almost twice that of units completed in the 1990s. Despite analmost 1 million increase in rental households associated with themeltdown of our mortgage markets, the number of vacant for rentunits has actually increased by almost 100,000 over the last year.Since the bursting of the housing bubble, the overall number ofvacant rental units has increased by over 400,000. There arecurrently over 4.1 million vacant units for rent in this country.In addition to this excess supply of housing, there are almost 7million vacant units being held off the market. In all likelihood,many of these units will enter the rental market as owners look forways to derive income from vacant homes. The glut in our housingmarkets is not only one of single-family units intended forhomeownership, but also one of recently constructed multifamilyrental units.

Recognizing that was a considerable amount of data, my basicpoint is that additional housing subsidies should be focused onstimulating demand. The most obvious method of doing so would bewith additional rental vouchers. Additional production runs thevery real risk of adding to supply, and hence putting downwardpressure on home, particularly condo, prices, which could have theperverse effect of increasing mortgage defaults. Additionalproduction could also increase multifamily mortgage defaults.

In addition to directing any additional housing subsidies onlyat tenant-based assistance, I also encourage Congress to examinethe feasibility of re-directing current unit based subsidies, whichare not already committed to a specific housing unit, towardincreased vouchers. Such a move would help increase the demand forrental housing while also providing much needed assistance to therecently unemployed.

A final concern with HR 3068 is both the precedent it sets forre-directing TARP funds and its potential to erode thechecks-and-balances that come with the appropriations process. Oncethe line has been crossed to redirect TARP dividends to non-TARPuses, I fear it will only be a matter of time before TARPrepayments are also redirected. While HR 3068 represents just over$6 billion, it could easily become the first-step in a process thatresults in $100s of billions being diverted. Such would only leavethe taxpayer with an even greater burden. I strongly urge anyadditional housing subsidies, trust fund or otherwise, to besubjected to either the appropriations process or to pay-go.

The repayment of TARP funds has raised a variety of legalquestions, perhaps the most important of which is the TreasurySecretary's ability to re-allocate those funds. Pronouncements fromTreasury have been mixed and at times in contradiction. I wouldsuggest Congress examine whether the Treasury Secretary has theability to re-allocate TARP funds once they have been repaid. Inorder to reduce the potential for additional losses under TARP,Congress should consider explicitly restricting the ability of theTreasury to re-spend TARP funds that have been repaid.

While the various bailouts have been truly expensive andshocking, I unfortunately do not believe all the bailouts arebehind us. In particularly, there is a high likelihood that tens ofbillions of taxpayer funds will be needed to re-build the FederalHousing Administration's single family mortgage insurance program.In order to minimize the ultimate cost of that bailout, I urge theCommittee to begin examining the structure of FHA and institutemuch needed reforms to protect the taxpayer from unnecessaryloss.

Chairman Frank, Ranking Member Bachus, members of the Committee,I again thank you for this opportunity and appreciate yourattention. I welcome your questions.


Mark A. Calabria, Ph.D.is Director of Financial Regulation Studies at the Cato Institute.Before joining Cato in 2009, he spent six years as a member of thesenior professional staff of the U.S. Senate Committee on Banking,Housing and Urban Affairs. In that position, he handled issuesrelated to housing, mortgage finance, economics, banking andinsurance for Ranking Member Richard Shelby (R-AL). Prior to hisservice on Capitol Hill, Calabria served as Deputy AssistantSecretary for Regulatory Affairs at the U.S. Department of Housingand Urban Development, and also held a variety of positions atHarvard University's Joint Center for Housing Studies, the NationalAssociation of Home Builders and the National Association ofRealtors. Calabria has also been a Research Associate with the U.S.Census Bureau's Center for Economic Studies. He has extensiveexperience evaluating the impacts of legislative and regulatoryproposals on financial and real estate markets, with particularemphasis on how policy changes in Washington affect low andmoderate income households. He holds a doctorate in economics fromGeorge Mason University.

Mark A. Calabria

Committee on Financial Services
The United States House of Representatives