It’s the $10 trillion question: “How do we move from the housing finance market of today, where almost all new single-family mortgage originations have some type of government support, to a future market far more reliant on the private provision of mortgage credit?
That was the challenge posed by the Federal Housing Finance Agency’s Acting Director Ed DeMarco in recent testimony before the Senate Committee on Banking, Housing and Urban Affairs.
The BPC Housing Commission, of course, has proposed a detailed plan to significantly reduce the role of the government in the mortgage market while encouraging far greater participation by risk-bearing private capital. Why? Because we believe a housing finance system with less government involvement and greater private participation will ultimately be more effective in meeting the mortgage credit needs of America’s working families.
Congress seems to agree. There appears to be broad consensus on both sides of the aisle that the government’s overwhelming presence in the single-family market (the government supports more than 90 percent of the market when measured by securities issuances) is unsustainable. The bipartisan Jumpstart GSE Reform legislation is a good first step in correcting this imbalance.
As Congress deliberates, the FHFA is proactively working to reduce Uncle Sam’s mortgage-market footprint. The FHFA 2013 Scorecard establishes a $30 billion target for transactions in which credit risk is shared by Fannie Mae and Freddie Mac with private institutions. The FHFA also expects to continue to increase the guarantee fees charged by the two GSEs in order to bring their credit-risk pricing closer to what would be required by the private sector. The hope is that leveling the “g-fee” playing field will encourage more private capital back into the market. In addition, the FHFA continues to reduce the size of the GSEs’ retained portfolios on an accelerated schedule.
In recent weeks, we have seen welcome evidence of a housing market on the mend. According to Gallup, fifty-one percent of Americans expect average home prices in their local area to increase over the next year, a sharp increase in positive public sentiment. In addition, it was recently announced that Fannie and Freddie earned large profits last year. President Obama’s 2014 budget even projects that the two mortgage giants will earn a hefty $51 billion profit by 2023, assuming they are not eliminated over the next decade.
As my commission colleagues Rob Couch and Nic Retsinas have pointed out, it would be a big mistake to allow today’s positive news to lull us all into a false sense of complacency. We have learned the hard way that the housing market is cyclical: periods of growth and home-price appreciation are typically followed by periods of contraction and price depreciation, with the cycle then repeating itself. Last year’s profits by Fannie and Freddie are also no guarantee of future performance. And there’s no doubt that the profitability of both institutions stems in part from their crowding out of private-sector participation.
So let’s keep our eyes on the ball. Let’s renew our commitment to build a stronger, more sustainable system of housing finance that expands consumer choice, while protecting the taxpayers from unnecessary risk.