With Homeownership at an All-Time Low, Why Is the Federal Government Tying its Own Hands?
It's been eight years since the 2008 economic crisis and homeownership is at an all-time low. More than five million homes have gone into foreclosure since the housing crisis, and Latino and African-American households are bearing the brunt of that misfortune with higher rates of foreclosure than other groups. But there are signs that the housing market can turn itself around, including home equity surpassing pre-crisis levels. Organizations like Prosperity Now are pushing for ways to continue to improve the economic viability in communities of color. With the right policies, we can be a nation with economic equity, no matter your race or socioeconomic status.
But if we know how to create greater economic prosperity for all, why is the housing finance system still in paralysis? A recent article in the Miami Herald noted the two agencies responsible for making home-buying more affordable—Fannie Mae and Freddie Mac—are in a "zombie state," functioning without enough capital reserves to withstand another market downturn. It turns out that in 2012, the U.S. Treasury decided to sweep all of Fannie and Freddie's profits into government coffers, leaving them increasingly dependent on the federal government to bail them out in the case of rainy day.
Unfortunately, the current status quo for these housing agencies, and the lack of action from lawmakers and policymakers, have led to uncertainty and instability that has scared buyers and lenders alike. Rising home prices and the tightening of access to credit has left low- to moderate-income borrowers out of the buying market. And, although the current director of the Federal Housing Finance Agency (FHFA) has authorized long-delayed contributions from Fannie and Freddie to the National Housing Trust Fund—which supports affordable housing construction for low-income families—those contributions are at risk if Fannie and Freddie post a bad quarterly report.
The current trend—given the rules put into motion by former FHFA acting director Ed Demarco—seems to be to gradually dismantle Fannie and Freddie and hand over their business to the too-big-to-fail banks. Under a credit risk-sharing policy, Fannie and Freddie push more of the credit risk associated with home loans onto investors, such as mortgage insurers and money-center banks.
In addition, Fannie and Freddie are being forced to build a new financial infrastructure—termed "the common securitization platform (CSP)"—which would ultimately help their competitors. Together, these policies are not a strong plan for comprehensive housing finance reform, but rather part of a strategy to achieve the ideological and competitive goals of privatizing the housing finance market and leaving American homebuyers with fewer protections from predatory practices. These approaches also risk further limiting access to housing credit for lower-income families and first-time homebuyers.
For years, Fannie and Freddie served the nation well by providing countercyclical market liquidity. By 2007-08, it became clear that reforms were needed. These reforms have mostly occurred, but siphoning Fannie and Freddie's earnings and forcing them to cede the core of their business to large banks leaves taxpayers exposed, marking a move in the opposite direction from what low-income potential homebuyers need. This dismantling of Fannie and Freddie—enterprises established to provide liquidity and stability to our nation's housing market—is already well under way. No one really knows what the new system will mean for homebuyers, capital markets or taxpayers.
Risk-sharing creates market distortions and instability. It is a much better investment for the American people to make additional fixes to Fannie and Freddie, allow them to recapitalize, and update their structure and regulatory oversight so they can return to their core mission: putting the dream of homeownership within reach for more and more Americans.