U.S. housing reform at risk of stopping way short
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Agnes T. Crane
America’s mortgage market almost sank the world economy. But no one has yet done anything to fix it. After blowing two deadlines, the government’s ideas are finally due out as early as next week from the U.S. Treasury, and these recommendations will frame the debate. But the danger is they will be premised on dogma that should in fact be seriously questioned.
Proposals have been circulating ever since the previous administration seized Fannie Mae and Freddie Mac in 2008. Most agree that both entities should be wound down, one way or another. But whether government should still have a role subsidizing housing finance is still up for grabs — or rather, few seem able to resist the idea that it should. The trouble is that financial types have become accustomed to a government safety net, and few of the constituencies involved are willing to challenge key U.S. housing myths.
Myth 1: Significant reform will kill the housing market.
Many fear any major overhaul of U.S. housing finance will slam a still tottering housing market. If America scraps its current system tomorrow, that’s what will happen. At a minimum, removing the government subsidy should nudge mortgage interest rates higher, potentially knocking home prices down further. But the UK took more than a decade to phase out tax deductions on mortgage interest. Homeowners, would-be homeowners and mortgage lenders can adapt to even a potentially wrenching change if there’s a five or 10-year transition period. The United States needs to get started on a plan.
Myth 2: The U.S. mortgage market is too big for the private sector to handle alone.
The $10.6 trillion mortgage market is huge, and Fannie and Freddie own or guarantee roughly half of it. But the size of the market — and the secondary market in securitized mortgages, and so on — was part of the problem in the years leading up to the 2008 crisis. The market is already down from its $11 trillion peak, but it is still nearly twice as big as in 2001. With the national average home price down more than 30 percent from its highs and millions of homeowners in danger of foreclosure, it’s clear only a smaller mortgage market is really sustainable.
Fully private-sector mortgages would be more expensive, but at the right price banks will lend. Studies conducted before the financial crisis suggested that government backing saved homeowners only 0.15 to 0.4 percentage point on their mortgage interest rates.
Myth 3: Investors would stop buying mortgage bonds without government guarantees.
Bill Gross, bond guru and co-head of Pimco, certainly has said he wouldn’t want to buy mortgages. Gross and others in his industry have grown used to the government guarantee. It reduces volatility and saves them some time-consuming analysis. But there are plenty of deep-pocketed investors looking for good investments and with the capacity to figure out their value. Again, interest rates would have to be a bit higher, and the securitization market would probably be a good bit smaller. But what existed before the crisis was unsustainable.
Myth 4: The 30-year fixed-rate mortgage is part of the American Dream.
It’s true that the current standard U.S. mortgage — one with a relatively low rate of interest fixed for 30 years but refinanceable at almost no cost — would probably be harder to get. Yet high home ownership rates in other countries prove this structure isn’t necessary to enable people to buy homes. A longish transition period would allow mortgage borrowers to get used to less generous home financing. And that’s preferable to having them pay much more down the line through their tax bills if investors need bailing out.
Myth 5: Government subsidies promote home ownership.
This doesn’t seem to be the case at all. Home ownership rates in the United States between 1998 and 2008 averaged 67.8 percent, just ninth highest out of 17 developed nations, according to a study from the University of California, Berkeley. Moreover, the study found that American homeowners paid significantly higher mortgage rates, roughly 1.5 percentage points more, than those in Europe. That means that even if home ownership is a worthy policy goal — a big “if” in itself — then subsidizing mortgages is not the way to do it.