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How to make sure housing doesn’t bring down the economy again

If you want to know what might be done, this is the document to study.

The commission's fix: retarget all new subsidies to the most vulnerable families, those earning 30 percent or less of the area median income.
Creative Commons/Ed Kohler

On Monday morning, the Bipartisan Policy Center issued its recommendations to overhaul the nation’s housing finance system.

No, the presses did not stop for the news, but this is one think-tank to which we should pay some attention. Founded in 2007, by four former Senate majority leaders, Howard Baker, Tom Daschle, Bob Dole and George Mitchell, it gathers opinion and analysis from both sides of the aisle as well as from leaders of commerce, industry and the nonprofit sector to figure out solutions to our knottiest problems.

And so it was with housing. Leading the effort, which took 16 months, were former heads of the U.S. Department of Housing and Urban Development, Henry Cisneros (Clinton), Mel Martinez (Bush II) and two former senators, Kit Bond (R-Mo.) and George Mitchell (D- Maine). They were aided and abetted by folks from the National Council of Homebuilders, the National Council of La Raza, local housing authorities, the Consumer Federation of America, the Coalition to End Homelessness — well, the list runs on and on. It is a consensus of notables on what should be done about a system that brought down the economy, sent families into financial ruin and devastated neighborhoods across the country. If you want to know what might be done about it all, this is the document to study.

Not surprisingly with a bipartisan effort, the proposals embodied no bold departure from the past. The group still endorses homeownership over renting, the mortgage interest deduction and the securitization of mortgages. And, in the spirit of our straitened times, it put a premium on spending as little as possible and cutting back on government involvement.

Help for the poorest

The one exception was the group’s approach to affordable, that is, low-income housing. As MinnPost noted last year, an increasing percentage of renters here and across the country, about 50 percent, pay way beyond 30 percent of their incomes for housing. (That’s the federal standard for affordability.) The federal government provides rental subsidies for those whose incomes fall below 80 percent of an area’s median income. If a family’s rent is 50 percent of income, the federal government will provide 20 percent to keep the household’s rent affordable. However, only a quarter of the families qualifying for federal subsidies actually receive them. Others sit on waiting lists for years or win a place in the program through a lottery.

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The commission’s fix: retarget all new subsidies to the most vulnerable families, those earning 30 percent or less of the area median income. (Ramsey County’s median income, FYI, is about $51,000.)  

Such payment subsidies would allow families to choose housing on their own, possibly moving to safer neighborhoods where schools are better. However, the program would not mitigate the need for new affordable housing, especially for the burgeoning ranks of elderly who won’t be able to stay in their homes.

To create more of it, the commission proposes expanding the dollars allocated to the low-income housing tax credit program by 50 percent. To pay for that, about $3 billion, and the housing vouchers, another $22.5 billion, the commission recommends limiting the extremely popular, don’t-pry-it-from-my-cold-dead-hands home-mortgage interest deduction (which costs the government $68 billion a year). How would that happen? The commission was silent on the amount and the method, though presumably the government could cap the amount of deductible interest at some nosebleed level that would apply only to the owners of multiple mega-mansions.

To Chip Halbach, executive director of the Minnesota Housing Partnership, whose mission is to assist communities in the creation and preservation of affordable housing, “providing every one of those households with a voucher guaranteeing them housing would be amazing” — tantamount to creating a right to decent housing for the poorest among us.

“Those households will still be in tough shape, but at least they’ll have a roof over their heads,” he adds. In fact, people who earn from 30 percent to 80 percent of area median income aren’t in such great shape either, but the commission recommends only that they be given short-term housing assistance in emergency situations, for example, a job loss or a medical crisis. Otherwise, they’re on their own.

Few ideas for the credit crunch

As things stand now, the government supports 90 percent of single-family mortgages. Via quasi-public entities such as Fannie Mae and Freddie Mac, it purchases home loans from lenders that originate them, package them as securities and then resell them to investors. Doing that frees lenders’ capital to make more loans. There is no explicit guarantee that if homeowners failed to make payments, the government would step in. But when the housing market went south six years ago, it did and both Fannie and Freddie’s fell into insolvency. 

Having taxpayers on the hook is “unsustainable,” says the report. “Reducing the government footprint and encouraging greater participation by risk-bearing private capital will protect taxpayers while providing for a greater diversity of funding sources.” That’s a roundabout way of saying that banks and other lenders, mortgage insurers and private mortgage securitizers should get back in the market.  

Private capital’s inability — and more recently, unwillingness — to participate is supposedly what is making mortgages hard to come by. But what would lure them back in? When queried about this, Henry Cisneros went vague. “It’s our belief that they will,” he said.

“Credit is tighter than it needs to be,” admits Barry Zigas, director of housing policy at the Consumer Federation of America and a member of the commission. Part of the problem is a reaction to the collapse of the housing bubble. Lenders are overcompensating for their previously lax lending policies. Only the passage of time will make that reluctance to lend disappear.

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Uncertainty has been another factor. Private companies did not want to securitize mortgages because federal law now requires the loans to be sustainable — meaning that banks must only issue mortgages that borrowers have a prayer of repaying. You’d think such a premise would go without saying, but, adds Zigas, “Lenders said there was a lack of clarity.” That has changed. As the commission’s report was finalized, the Consumer Financial Protection Bureau promulgated lending regulations. Banks may not like the rules, but they are now clear.

Finally, the commission would make the market safer for investors by creating a so-called Public Guarantor to replace Fannie and Freddie. Its funds would be made up of collections from the lending industry, and it would repay investors if any homeowners, lenders, insurers and everybody else involved failed to cough up their payments.

Yesterday’s problems

Whether the commission’s recommendations would actually change much is open to question. Keith Gumbinger, vice president of HSH, the largest publisher of mortgage information, says that many of the problems the think-tank is trying to fix are now behind us.

Getting a mortgage, for example, is no longer impossible. “The days are gone when you could breathe on an application and get it approved,” he says. “But the vast majority of humans with decent credit can qualify.”

As for Fannie and Freddie, they are returning to solvency. In the last quarter of 2012, Fannie Mae brought in a net income of $1.8 billion. Gumbinger didn’t see a need to scrap the agencies. In fact, he adds, “They were what kept the housing market going for the last five years.” 

“It seems as though the commission is trying to solve yesterday’s problems,” he adds. “They should be looking at future problems, but, of course, nobody knows what those will be.”