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The Bipartisan Policy Center's Housing Commission recently painted an interesting picture of the future role of the federal government in housing finance in a little-noticed report issued in February. Titled "Housing Future: New Directions for National Policy," took a view that is both long and deep--long in looking at a multi-year time horizon and deep in probing demographic and policy considerations, as well as the obvious market-based influences.
The report helped to define the gap between a healthy private housing finance system and what we have now.
The good news is that many of the elements of a healthy system seem to be just around the corner.
Lending volume: The private market seems willing and able to provide capital and investment initiatives to bridge the gap if only the federal government would get out of the way by gradually reducing the share of new mortgage loans that Fannie and Freddie purchase and the share of mortgage-backed securities that the Federal Reserve holds. Interest rates would rise somewhat to meet the ROI requirements of the private sector, but given how low mortgage rates now are, the shift to private sourcing should not unduly burden the consumers of that credit.
Balance between ownership and rental: A significant shift from homeownership to renting is in process. The tighter credit standards that have prevailed since the financial crisis will surely continue as private capital comes back to the market. The regulatory regime as well as market psychology will dictate that homeownership is not available to everyone.
Fortunately, demographic preferences of younger households seem to favor, or at least be reconciled to, rental to a greater extent than recent previous generations.
Mortgage infrastructure: The corporate capacity for underwriting, originating and servicing mortgage loans has regenerated itself. Lenders who made it through the financial crisis intact, along with newly formed players, have worked out the kinks in the process. Through the massive refinancings of the last few years, they have funded and serviced loans, mainly for the GSEs, but nonetheless, they are gaining capacity and experience. The servicers have suffered through the growing pains of overstressed systems and pressures of lawsuit settlements and customer demands. The platforms that they have finally built seem to be robust and large enough to handle the workload.
Disclosure infrastructure: While the private sector market has been practically dormant these last few years, regulators and industry groups have been busy reformulating the disclosure practices for the secondary mortgage market. Ideas about how transparency might have averted the last crisis have been the jumping off point for efforts to standardize practices and expand data access through technology.
However, there is one part of the secondary market that is far from recovered. Monoline insurance companies, which in the earlier era insured mortgage-backed securities, have almost all been forced to reorganize in bankruptcy.
Though some are back in business, they are mere shadows of their former selves. Thus, the challenge of the new era may be that of providing insurance. Bond insurance is but one form of credit enhancement, and some may think it a bit player in the secondary mortgage market. Yet, it has always been an essential lubricant for well-oiled securitization machines. The Bipartisan Policy Center's report envisions a "public guarantor" that would provide catastrophic insurance to stand behind other credit enhancement as well as a tranche of private capital.
Could Fannie and Freddie be the vehicle for this insurance? Could this be their long-term role in a revised system of mortgage finance? A transition away from capital-intensive ownership to backstopping the private investor capital could be done gradually.
For all their faults, Fannie and Freddie already possess the industry knowledge, data, and systems to conduct the risk analysis that catastrophic insurance would entail. It's something to think about.
