A monumental opportunity has presented itself as Julian Castro, former mayor of San Antonio, takes over as the new secretary of Housing and Urban Development and Congress looks ahead on the critical issue of housing finance reform.
After years of tepid growth and false starts, leaders in Washington have the opportunity to give housing finance reform a shot in the arm. This reform is readily achievable even in today’s log-jammed Congress, as there is bipartisan consensus that the most prudent reforms would accomplish three essential goals: appropriately and strategically wind down Fannie Mae and Freddie Mac in a way that strengthens the housing sector, ensure private capital is sustainably attracted to the market, and fairly treat current and future homeowners, taxpayers and investors.
Previous reform efforts have left everyone who knows the importance of getting this right wanting. Most recently, Senate Banking, Housing, and Urban Affairs Committee Chairman Tim Johnson, D-S.D., and ranking member Michael D. Crapo, R-Idaho introduced legislation that would increase the role of taxpayers in housing finance, disadvantage community banks and credit unions verses larger banks, and, incredibly, politicize the mortgage credit markets to an even greater degree.
Moreover, the Johnson-Crapo bill would lock in the federal government’s previous move to seize the gains of private investors. Rather than send a signal to the market to attract the kind of private capital necessary to transition away from the GSEs, this approach, on the contrary would discourage private capital and make taxpayers liable for irresponsible lending. Because mortgages would consequently become more expensive to acquire, the legislation would also seriously impact the ability of many American families to afford a home.
Unsurprisingly, this approach came under fire from all sides of the political spectrum, from Ralph Nader to the Independent Community Bankers Association to the NAACP to 60 Plus. Fortunately, most believe the legislation has stalled, providing a great opportunity to step back and pursue a more thoughtful reform for which there is a great deal of bipartisan consensus.
There is broad agreement that private capital must come back and replace government involvement, but terminating Fannie and Freddie too hastily or without proper support risks another housing market collapse. To avoid a shock to the economic system that could specifically endanger the market for the 30 year fixed product — a main engine of the housing market and the primary avenue for sustainable homeownership — and to avoid putting added pressure on a nascent recovery will require a thoughtful approach with an appropriate framework.
It’s time leaders in Washington enact federal legislation that responsibly winds down Fannie Mae and Freddie Mac and sets up a new system funded by private capital with a limited government role and strong regulatory oversight.