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Government Backstop Necessary for Sustainable Mortgage Market?

The Housing and Insurance Subcommittee held a hearing Thursday titled “Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform,” inviting several private sector leaders and policy researchers to provide their opinion on necessary changes for the mortgage and housing industry.

During the meeting, the panel outlined recommendations to reform the Federal Housing Administration as well as Fannie Mae and Freddie Mac, what regulatory, legal, and statutory impediments can occur with private capital returning to the housing finance system, and what factors and metrics for Congress to consider when reforming the housing finance system, according to the memorandum.

The panelists included David H. Stevens, President and CEO of MBA, Jerry Howard, the CEO of the National Association of Home Builders, Sarah Edelman, Director of Housing Policy for the Center for American Progress, Dan Goodwin, Director of Mortgage Policy at the Structured Finance Industry Group, Kevin Brown, Chair of the Conventional Financing and Policy Committee for the National Association of Realtors (NAR), and Robert Dewitt, Chairman of the National Multifamily Housing Council, speaking on behalf of the Council as well as the National Apartment Association.

“I look forward to having a more vigorous conversation with all of you on these topics as we would move forward,” said U.S. House Rep Sean Duffy (R-WI) and Chairman on the Housing and Insurance Subcommittee. “I would just hope that there’s going to be agreement, one, on the government backstop, but also, that we want market principles at play,” he said. Duffy went on to say that market discipline helps make sure another housing crash doesn’t occur.

U.S. Rep. Dennis Ross (R-FL) asked the panel if it was necessary to have a government backstop in order to sustain a 30-year mortgage, with Brown replying “yes”, mirroring the whole panel’s response. He then asked the panel about a particular type of backstop, that is “private shareholders with a rate regulation-type environment that’s used in utilities” and if that would be a viable direction to take.

“What we’re calling for is a mortgage-market liquidity fund, and that’s the rainy day fund.” said Brown. According to Brown, the fund for the GSEs would store profits in preparation for catastrophic losses after the system went through private capital, becoming a last resort to protect taxpayers. In response to Ross’s question on how the backstop should be restructured in terms of the homeowner’s, lender’s, and government’s level and reach of participation, Edelman responded “We do want a situation where the government is just the backstop and the market of last resort.”

When asked by U.S. Rep. Brad Sherman (D-CA) on whether Congress should increase the amount of GSEs to more than two, Brown responded “Having two, we think is a perfect balance, we think that that has led to competition and innovation, so that has worked out well so far with the GSEs. Having multiple guarantors, we think would be just a race to the bottom in terms of pricing and then we would have liquidity problems in the market.”

The topic of the mortgage-interest deduction cap was also a consistently discussed topic during the hearing, with a few representatives concerned of it being reduced and possibly removed.  

U.S. Representative Michael Capuano (D-MA)  asked the panel on whether not the reduction of the cap would help increase homeownership or business.

“We don’t think so sir, we are very concerned about the tax bill on housing. While we are in favor of the doubling of the standard deduction, we think there are revenue-neutral ways that the tax bill could solve the problem it creates with housing” replied Howard.

U.S. Representative Al Green (D-TX) considered the cap lowering as a sign of it eventually being eliminated entirely and asked for Jerry Howard’s opinion on its reduction. “We’re angry. We think it’s very bad policy. We think it picks geographic winners and losers. We think it’s going to lower house values and it could lead to a housing recession.” Green then asked Brown who agreed with Howard. “Our economist came up with a number with a repeal of the SALT as well as a doubling of the standard deduction and we feel that it’s gonna be a 10 percent drop nationwide.”        

The full press release can be viewed here.

About Author: Dean Terrell


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