Achieving Market Sustainability

What are the most pressing issues in housing policy today?

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There are three significant issues that have to be addressed by housing policy: the oversupply of single-family homes, a continuing wave of foreclosures, and long term uncertainty in the mortgage financing system.

There are not enough entrepreneurs building, not enough consumers buying, and newly foreclosed supply continues to crowd the market. Our historically low interest rates are serving the re-financing market rather than enabling new owners. Meanwhile newly vacant units drive down the value of contiguous occupied units and accumulate rehabilitation costs for future occupancy.

The best way to manage oversupply is to incent the one sector where there is growth in demand: rental housing particularly for households’ below 120% of median income. Some of the newest renters are former homeowners and new households in formation are delaying home purchase, due to value volatility and a stricter underwriting regime.

A non-income categorical investment tax credit designed along the lines of the current Low Income Housing Tax Credit or the historic rehabilitation credit would help restore distressed properties and stimulate residential rehabilitation. There are other ways to design a stimulus outside of the tax code but whatever the best route, we need to do it as the surest way to remove supply. 

Generating more rental units has to be accompanied by doing more to keep people in homes. Some servicers are now considering principal reduction strategies through shared equity arrangements with borrowers; when the market improves, potential principal can be recovered. 

Any proposal for principal reduction carries moral hazard consequences that have to be considered. But we are paying the price for the fact that we did not respond to the housing crisis with policies whose ambition fit the depth of the problem. 

When a national  stimulus was being designed we could have created a 1930’s style Home Owner’s Loan Corporation with the capacity to finance or partially guarantee a non-amortizing second mortgage (with designated payment triggers)  and the ability to refinance distressed owners at lower rates and longer terms. 

 One way or another, principal is being reduced: the question is how fast, who pays, is there any capacity to recover it in a predictable way, and are there reduction schemes that do not carry with it too much (moral hazard) contagion. 

Mortgage financing certainty is a longer term problem. As the consumer debt bubble burst, the structural fragility and skewed incentives of the housing mortgage system became clear.  And yet we are in still in a state of policy drift regarding the ultimate form of Freddie Mac and Fannie Mae, the declining balance sheet of FHA, and a residential securitization market that gave us AAA rated toxic assets.

We migrated from a pre-recession state of giving away mortgage money without standards to extraordinary inefficiencies in new originations. We need to know where we are going, what the time line for change will be, and how a new incentive structure will increase the likelihood of market sustainability. 

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Jeremy Nowak is President and CEO of the William Penn Foundation.

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Welcome to the BPC Housing Commission expert forum! This forum is intended to foster interactive and substantive discussion about pressing housing issues. Each month contributors from different parts of the housing sector will be invited to respond to a discussion topic. Guest posts will feature prominently on BPC’s website, as well as be shared regularly with Housing Commissioners to help inform their work.

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