Bipartisan Policy Report: Housing Is Broken And Urgent Action Needed

By Alanna McCargo

On Tuesday, the Bipartisan Policy Center(BPC) released its long awaited white paper:Housing America’s Future, providing recommendations on housing policy for the American Housing Finance system. The report is the result of 16 months of research, collaboration, meetings, and analysis conducted by BPC’s Housing Commission-a group of former Congressional leaders, industry experts and policy makers interested in making progress in the recovery of America’s housing system. The 134-page report covers a number of key housing topics and reflects on American housing history, the current state of home ownership and rental, impact of changing demographics on housing, and opportunities to reform the housing finance system and fully recover from the economic down turn. Read the full reporthere.

BPChousing

Untangling A Complex Web

Housing has been at the epicenter of the failing American economy, and the BPC report provided great insight into issues that led to the housing downturn and what can be done to ensure the same mistakes are not repeated. The question that remains is whether the vision laid out for the future can become real actionable policy? Is it possible to untangle the current housing web without causing total disruption to an already fragile market?

The American housing finance system is extremely complex, with a number of players involved in the process from government (federal/state/local), consumers, financial institutions, housing counselors, realtors, appraisers, insurers, securities investors and the list goes on and on. This complexity and the sheer number of stakeholders involved in the sale, origination, servicing and securitization of a single American mortgage are a big part of the problem with the overall system. The BPC Housing commission offered some suggestions to simplify the system and make the risk more transparent so that it can be properly managed and priced. This seems directionally correct, but the ability for the housing industry to implement and unwind many years of the tangled web will prove to be the biggest challenge-particularly where government guarantees, mortgage backed securities and private investors are involved. Suggestions to unwind Fannie Mae and Freddie Mac have been floating around the industry and Capitol Hill for quite some time, and the commission paper agrees this is necessary. The report suggests that unwinding these government-sponsored enterprises will take a lengthy transition and a fallback agency to play some critical roles these entities play in the housing finance system. The new replacement structure would have a role to set standards and provide a backstop for the riskiest mortgages, providing a ‘catastrophic guarantee’, that would continue to provide confidence in mortgage backed securities and the ability to sustain a long term fixed rate mortgage structure. Given the state of our government, its lack of a budget and the pending sequestration, it doesn’t seem feasible that anything could happen quickly. Furthermore, the ability to gain consensus and build policy and to make operational such massive change in the industry will take years to accomplish.

What The Report Means for Average Americans

Some observations for consumers to take away from the report and how the average American might be impacted by some of the recommendations of the Commission if they became policy:

1. Renting is a key part of housing future. Given the fast changing demographics and the higher bar to get into home ownership, rental is and will be at the core of future housing needs for Americans. Access to affordable rental and incentives for renters similar to those of home buyers would provide some potential tax relief to renters that today only homeowners get the benefit from. The need for safe and affordable rentals has never been greater, and the demand is high. Focus on rental programs for the future will be key as more American’s move to renting vs. buying.

2. Tighter Credit and Underwriting for mortgages will return. This is already taking place as the market contracts and responds to new regulatory requirements for mortgage lending that have come about since the housing crisis began. This means ‘back to the basics’ of underwriting mortgages, where larger down payments would be required, higher reserve requirements (savings) and strong debt to income ratios would be needed to ensure the mortgage loan could be supported long term. For average consumers, that means low/no down payment programs would be scarce, and first time home buying may take longer to achieve.

3. Reduced government involvement in housing finance, which means the the role government plays in the housing process becomes more of a support role to help under-served borrowers and communities with financial education, subsidies and first time homebuying assistance. For average consumers, government pull back could mean higher cost for financing a mortgage (higher interest rates) as the private industry takes more control and ownership back. In addition it may mean you have less access to long term financing options like the 30-year fixed rate mortgage, because the risk on such long term lending is very high to financial institutions and investors. There is a good and bad side to government involvement that will have to be weighed as new policies come forward. Either way it impacts you, either as a taxpayer who bears the cost of government involvement or as a consumer who bears the increased cost to finance.

4. Counseling will have a critical role and the government should continue to provide more robust and reliable educational resources and counseling for first time home buyers and those struggling with debt and mortgage payments. These services would help consumers ensure they make the right buy vs. rent decision and help new entrants into housing navigate the waters with support and at no cost to the consumer.

The report from the Housing Commission concludes with a compelling call to action. It stresses the urgency of fixing our broken housing system to ensure a sustainable future given the rapid changes taking place nationally. The issues need to be kept front and center in the national policy agenda, and as the Administration and Congress make key decisions around spending cuts that might potentially harm America’s housing future. The report concludes: “Our nation’s housing system is broken. Home ownership remains out of reach for far too many families who stand prepared to assume its financial and other obligations, while limited access to affordable mortgage credit impedes our nation’s economic recovery and future growth… The problems we face in housing are so significant and so urgent today that inaction is no longer a viable option. In responding to these problems, we have an opportunity to improve the lives of millions and make America a stronger and more economically vibrant country, today and well into the future.”

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Real Barriers to Homeownership

New entrants to homeownership will need more financial education resources, training and financing programs to help navigate the process and become successful homeowners. First time homebuyers, millennials, new immigrants, minorities, women head of households are all projected to be the demographic types that will drive housing demand in the future. New focus, financial literacy programs, housing programs and credit access methods will be key to successfully serving the new housing market.

“If you get, GIVE. If you learn, TEACH.”

-Maya Angelou
4/4/28 – 5/28/14

 

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