After I posted Real Estate Is About Jobs (Feb. 9), I received several dozen comments from members. Some of you questioned NAR’s stance on the best way to restore housing markets. I want to thank each and every one of you for taking the time to engage with us and share your opinions. We will be seeking more member feedback during our Home Ownership Matters bus tour next month. I also want to try to address some of the concerns that were raised. I think it’s important that you know where the National Association of REALTORS® and your Leadership Team are coming from on some of these contentious issues. We may not agree on every point—but please believe that NAR recognizes and respects the differences that exist within our million-strong association.
In your blog post you suggested that we can increase home sales by (1) preserving the mortgage interest deduction, (2) moving the credit pendulum to equilibrium, and (3) maintaining government backing in the mortgage market. Two of those items—MID and government backing—seem to be about maintaining the status quo. How will that drive up home sales?
According to our research, the market is underperforming by some 20 percent. We are at 2000-level home sales—yet we have 30 million more people living in the United States today. A federal commitment to maintaining the MID and government backing would bring more certainty to buyers and investors. Getting back to a normal level of underwriting—combined with an improving job picture—would get the country back on track to a normal level of sales. The issue of jobs is critical, and one of the messages we’re sending to Congress, as they begin their debate over the 2012 budget, is that housing creates jobs at home.
A few members have suggested that we give up on the mortgage interest deduction. However, a vast majority of NAR members, nearly 80 percent, said in a recent survey they favor retaining the mortgage interest deduction as is and look to NAR to carry that message to Washington. Yes, during these financially challenging times, government incentives must be scrutinized. But let’s not allow our critics to use today’s crisis to end a policy that has served U.S. citizens well for decades.
Why should the federal government even have a role in housing?
NAR supports the free-market system for real estate financing. The ideal marketplace is one in which individual home buyers and multifamily developers transact business with private lenders. History reminds us, however, that the federal government plays an important role in regulating lenders and ensuring the smooth flow of capital. In tough economic times, private financing may simply choose to exit the market; the government provides gap financing when the private market does not or cannot participate. Without the active participation of the GSEs, and programs like the FHA, VA, and Rural Housing Services loan programs, there would be no money to fund home purchases and our ongoing housing recovery would not be possible. When private markets are healthy and we return to a more typical lending environment, the role of these entities should reduce. The government also protects borrowers against predatory lending practices that borrowers might otherwise not recognize. One of the lessons of the mortgage market meltdown is that banking regulators weren’t doing enough to rein in bad lending practices.
How do Fannie Mae and Freddie Mac fit into that?
Fannie Mae and Freddie Mac (together known as government-sponsored enterprises, or GSEs) have traditionally played two important roles. One, by purchasing mortgage loans and securitizing the loans for sale to investors, they have enabled lenders to have ready capital to make more loans for home purchases, small-business lending, and other purposes. Second, by setting underwriting standards for the loans they purchase, Fannie Mae and Freddie Mac have helped ensure the quality of the collateral for investors and created a level playing field for consumers.
But weren’t Fannie Mae and Freddie Mac “standards” one of the main causes of the mortgage meltdown? Didn’t they encourage lenders to reduce their underwriting standards in order to expand home ownership to underserved groups?
The GSEs made numerous missteps in the years leading up to the mortgage crisis. Almost all investigations and reports on the crisis, however, have agreed that the GSEs were only one factor in a system-wide breakdown. It was the private-label securitization of bad loans—and the packaging of those securities into “tranches” enabling investment banks to make money on the same underlying collateral over and over—that led the way to the crisis. The U.S Treasury report, Reforming America’s Housing Finance Market, released on February 14, 2011, explains:
Initially, Fannie Mae and Freddie Mac were largely on the sidelines while private markets generated increasingly risky mortgages. Between 2001 and 2005, private-label securitizations of Alt-A and subprime mortgages grew fivefold, yet Fannie Mae and Freddie Mac continued to primarily guarantee fully documented, high-quality mortgages.
But as their combined market share declined – from nearly 70 percent of new originations in 2003 to 40 percent in 2006 – Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits. Not only did they expand their guarantees to new and riskier products, but they also increased their holdings of some of these riskier mortgages on their own balance sheets.
In other words, the GSEs followed the private market into the too-risky lending practices and then compounded the problem by holding in their own portfolio the securities created using these risky loans. The quasi-governmental status of the GSEs, combined with their need to make money for shareholders, resulted in an unacceptable level of risk taking. To date, the government has put $132 billion into honoring the guarantees made by the two agencies.
So why does NAR seem to be speaking out in support the GSEs?
To be clear, NAR does not support the status quo. We do not believe that Fannie Mae and Freddie Mac should be reconstituted as they were before the crisis. The public mission of the entities, ensuring the flow of mortgage capital, cannot exist alongside the private profit motive that led to the GSEs’ downfall. More than a year ago, an NAR Working Group released a set of principles for reforming the GSEs. We recommended that they be converted to government-chartered, non-shareholder owned authorities—subject to strong regulation—that can accomplish their mission of creating a steady flow of affordable mortgage capital and protect the taxpayer.
We’ve read that many of the banks that accepted TARP money have paid much of it back with interest. Will any of that $132 billion paid to cover the GSE guarantees ever be made up?
The two companies, under the rules of their conservatorship, are required to pay the government a 10 percent quarterly dividend on the money they receive from the U.S. Treasury. The Obama administration has calculated that, by 2013, the companies will be paying back in dividends more than they receive in assistance. In its 2012 budget request to Congress, the administration estimated the bailout will end up costing the taxpayers about $73 billion by 2021. NAR believes the 10 percent dividend is too high (higher than the 5 percent banks paid under TARP) and has asked the Treasury Department to reduce it, retroactively. If they did that, the GSEs could start paying back the government soon and more quickly.
Why do we need a secondary mortgage market? Why not let the private market take the risk?
Without a secondary mortgage market, private lenders would likely do away with the 30-year fixed rate mortgage because of the interest-rate risk to lenders and investors when they hold these loans. The market would be primarily shorter-term and adjustable-rate mortgages, which put the interest-rate risk on the borrowers instead of large institutions like insurance companies and pension funds that are equipped to manage this risk. The 30-year fixed-rate mortgage has provided generations of Americans with a chance to own real estate and build wealth over time. In the preamble to the NAR Code of Ethics, our founders talked about the value of real estate ownership:
Under all is the land. Upon its wise utilization and widely allocated ownership depend the survival and growth of free institutions and of our civilization.
That’s why, during the 1930s, we fought for creation of a secondary mortgage market, and it’s why we are fighting for reform today that will restore the important role the GSEs played for many years. — Ron Phipps, 2011 NAR President