Falling prices and rising foreclosures cause a policy quagmire
America’s housing market
Feb 3rd 2011 | Washington, dc | from PRINT EDITION
WHEN the federal government took control of Fannie Mae and Freddie Mac, two teetering mortgage-finance agencies, in September 2008 it was meant to be temporary. Yet their surreal existence as shareholder-owned prisoners of the state looks likely to drag on for years.
Nobody is happy with the status quo. The federal government routinely guarantees 85% or more of newly issued residential mortgages, primarily through Fannie, Freddie, and the Federal Housing Administration (FHA). But withdrawing that support is impossible while the housing market is so fragile. The Treasury is scheduled to release a proposal for overhauling America’s housing-finance system as early as next week. But rather than resolve the status of Fannie and Freddie, it is likely to lay out several options, none of which is likely to become law any time soon.
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The role of the FHA, which is to guarantee mortgages with low downpayments to families of modest means in return for a fee, is relatively uncontroversial. The big debate is to what extent the federal government should also guarantee mortgages to middle-class families. The Treasury’s options will include doing so through a stand-alone federal agency—perhaps a nationalised version of Fannie or Freddie—or by selling an explicit government guarantee for a fee to any lender, much as the Federal Deposit Insurance Corporation charges banks to insure their deposits.
Neither option is likely to satisfy Republicans who have previously pushed either to wind up or to privatise both agencies in the next two years. Since taking control of the House of Representatives in January they have agreed to a longer transition period but still insist the federal government should no longer have a substantial role in the mortgage market.
That option may be among those laid out in the Treasury’s paper. But few inside the Obama administration support it. They believe the next time the mortgage market is in trouble the federal government will step in again. Better to accept the fact now and charge for it, they reason. Nor would America’s still-powerful real-estate industry let its federal safety-net go without a fight. Republicans, says Michael Barr, a former Treasury official, are torn between “the tea party and the home builders and realtors, which means they won’t be ready to cut a deal for a while.”
The Treasury can start to trim back the firms’ role in other ways. Fannie and Freddie are allowed to guarantee mortgages as big as $729,750, but in October that limit should start to drop, leaving more of the market to private firms. The fees they charge for their guarantee can also be raised, crowding in private insurance.
But the Treasury’s power over the pair is limited as long as they remain under the control of the Federal Housing Finance Agency, an independent agency. The Treasury cannot, for example, force them to write down mortgage principal to mitigate defaults, even though taxpayers rather than shareholders would bear any associated costs. That is a pity, given the government’s flailing foreclosure strategy.
When Barack Obama first unveiled the Home Affordable Modification Programme (HAMP) in March 2009, the hope was to modify 3m-4m mortgages by subsidising payment reductions through the Troubled Asset Relief Programme (TARP), a bail-out fund. But by the end of last year, only 522,000 loans had been permanently modified. Of the $50 billion originally allocated to the programme, just $1 billion had been spent, according to Neil Barofsky, the TARP’s watchdog. “It’s remarkably dispiriting,” he told Congress on January 26th.
The Treasury argues that many borrowers it thought were eligible for help turned out not to be because they earned too much, their homes were too expensive or were not their primary residence, or because they couldn’t meet documentation requirements. Many who were eligible, it says, got a private modification instead.
Still, the lack of progress means foreclosures are likely to be higher this year than last. That will maintain downward pressure on home prices, which have resumed their fall after the expiry of a tax credit last year. The home-ownership rate fell to 66.5% at the end of 2010, its lowest level since 1998, as many former and would-be home-owners rent (see chart). Long after the crisis and the recession, the housing bust that caused them lingers on.
from PRINT EDITION | Finance and Economics