Why We Value the Government’s Role in Housing, Posted by Ron

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

  1. 1st licensed in 1973 I saw the failure of the Savings & Loan companies. Now even with Fannie May & freddie Mac we have failure to a larger degree.

    Risk is risk and the private sector shoukld bear the burden. While you saw homeownership at an all time high, DON’T take any credit for that. Unless You bear the burden for 1 million foreclosures last year and 1.2 this year.

    Government makes a mess of everything they touch. Look at the USPS it is losing money.

    Quit lobbying and let the people determine through free trade what is going to happen and if that means 10 year mortgages, so be it.

    14Plus trillon dollars in debt. No relief at all for me the small business man. No bailout, no cheap mloans to stay in business, pay my on benefits and pay you what amounts to dues for NOTHING.

    YOU, NAR instead of looking at hopw many members you can get paying dues should have been all over Washington in 2004 trying and succeeding in slowing things down.
    I persoanlly did not deal in “D” paper in 2004 and 2005 so I can proudly say while I made fewer sales I did not put people in homes that would wind up BROKE.

    Shame on you. You do not look out for the realtor at all in my opinion. The only thing worse is the local association and nl less blame for state association.

    If it were not required by my broker and the MLS I would drop membership in the realtor organization like a hot potato.

    STEVEN HARP, these are my opinions alone

  2. Interesting read.

    Hard to see how Fannie and Freddy can be transitioned into something better than just let the open market would come up with.

  3. I believe that Bank Owned Properties and Short Sale properties should be treated seperate from other homes. This would make appraisals more accurate on homes that are not under water. It would also make it easier for buyers who are just looking for discounted homes.

    Concerned Broker

  4. Faye Grover

    Home sales can be increased by perserving the mortgage interest deductions on home ownship and second homes.
    The American Dream is still owning their own home. Rent has become so high that you can buy a home cheaper than rent. It still is great to buy a home, because your rent money is gone at the end of the year.
    I really think it is time for us to start help our people that are in service for our country.
    yes, they can get a va loan, but most of them need help with their credit scores mostly the younger generation. I believe we should drop the credit score where we can get more people qualified to buy homes. Remember, the lost of jobs has caused the crisiss in our home loans. Not the people who had low credit scores.
    It seems to be that our government does not want people to own their homes, but live in government homes.

  5. Faye Grover

    Our taxes have gotten out of controll. Small Businesses do not have a chance.
    Small business is helping our economy, but we are being pushed to close our doors.

  6. Michael Berry

    Let me offer the suggestion that the mortgage interest deduction of IRC Section 163(h) be repealed, and in its place, enacted a deduction for payments made to reduce loan principal on a residential purchase money mortgage.

    I am not a real estate professional, but believe that a deduction for principal payments instead of interest has more market stimulative potential than preserving the MID. In the short-term there may indeed be negative revenue impact on the federal budget, but long-term, replacing the open-ended MID (which an owner can perpetuate until he or she dies or sells the house, by serial refinancing or adding on consumer debt) makes fiscal sense.

    To have any positive fiscal impact long-term the MPD (mortgage principal deduction) must be limited to a primary residence, and limited further by capping the deduction on subsequent purchase money loans or re-fi’s by allowing the MPD in those circumstances only on payments made to principal amounts exceeding the cumulative amount of prior MPDs.

    Ultimately the owner who doubles down on principal payments benefits by having the largest tax deduction his budget and loan amount will permit, and has lower interest payments in subsequent periods.

    The kicker for the real estate market is this: buyers who have accumulated equity by taking advantage maximum advantage of the MPD are less desperate sellers, less apt to let a home go into foreclosure, and at least in theory they embark on the next home search with a bigger down payment fund, making upgrading and relocating more attractive.

    Where’s the rub?

  7. Jim Schultz

    We are fighting over scraps as the noose of government intrusion and control of our lives slowly chokes the life, liberty, and the pursuit of happiness (ownership of property) out of us, transferring our capital earned from our sweat equity to those in control.

    NAR is promoting a “hang on a little longer my friend” solution in the face of a totally co-opted free market capitalist society. Banks that cannot fail are consuming all the smaller banks that are allowed to fail. Every time the Treasury takes out a bond, it is making the tax payer pay interest to the Federal Reserve, a private for profit organization that operates in its own self interest. The more wealth is transferred to their member banks, the less responsive they become to the US citizen.

    GSE’s, FHA, VA, and Rural loans are on the citizen’s side. The banks are on the Federal Reserve’s side. Regulation attempts to create a level playing field between the two opponents in the contest of wealth creation. However, rules of the game that are not enforced with a referee lead to mean spirited hurtful violations that destroy the ownership game that makes the United States so very different than the rest of the world.

    The most painful part of the process is when it appears that the referee has chosen sides and ignores violations against one side in favor of the other. Players, coaches, spectators, and the sport itself get discouraged to the point of anger, disgust, despair, resignation……

    I encourage all of us to fight the good fight. By that I mean, let’s straighten out the rules committee, let’s hire honest referees, let’s promote the game, let’s encourage each other to bring more players to the game, let’s make sure that the sweat generated capital is not stolen through the sleight of hand trickery of the protected few, and let’s start down the long hard road of reclaiming our heritage.

    Government organizations that support the strength of the real estate market are necessary evils to counter the self interest of the FED. However, they must be on point, the point being to help each citizen grow wealth through property ownership.

    This is what I believe NAR is working hard to do. Let’s keep our organization on point with our diligence and support. Let’s get educated with all the facts they and others provide. And then make our Republic work through addressing our representatives on this issue vital to our very livelihoods.

  8. Stephanie

    I already contribute to TREPAC, but that is at my own decision to do so. I am uncomfortable with being asked to raise my dues to go solely towards a Political Action Committee that NAR would control where and who they feel speaks the voices of ALL it’s members. I; for one, do not believe that we should support the GSE’s. In my opinion I feel through the various administrations in the past and present the inability to see what these initiative do in the long run just speaks to the failure of the Governments role in the real estate industry to begin with.

    I am not ever in favor of intitlements and work hard for what I have and give. I feel the only way I could ever support NAR with the using of my dues towards political actions is for a clear, concise message each and every time those monies would be used for any lobbying of candidates or measure being proposed.

  9. In realilty the MID costs the government nothing. Every dollar of MID deducted by a homeowning taxpayer is paid to someone who is liable for income taxes on that money.

    If the MID were eliminated, homeowners would make every effort to pay off their mortgage. The same happened when deductions for interest on auto loans and credit cards were eliminated. The only taxpayers hurt are those who cannot afford to finance themselves on a day to day basis. Most of those are people who already pay little or no income taxes (the lower income 50% of Americans).

    In my case, I have income from a $1m carryback note from selling my previous home, and at the same time I have mortgages of $0.75m for my current homes. If the MID were eliminated, I would cash out my note and pay off my home. Net to the USGOV would be zero. Actually the net to USGOV in long run would be negative, because next time my buyer would not even buy the house because the lack of MID on the loan would run his monthly cost up by 20% or more. The whole economy would be stifled.

    In the case of other Americans, they simply would not move if a new mortgage were involved. This would inhibit moving to a new job or to a retirement area.

    I could understand eliminating MID if it were not for the fact that government collects taxes from the interest recipient. It is simply not fair to collect from both. In fact, I am in favor of returning the tax deduction for consumer loans. It would be a great stimulus to the economy, and the consequently increased frequency of consumer loans would likely generate significantly more GDP and more government income, not less.