Treasury Considers More Aid for Housing

Monday, October 12, 2009

HOW BADLY DID the U.S. housing market crash? Well, just look at how much federal aid it has taken to stabilize it, at least for now. The Federal Reserve has bought almost $700 billion worth of mortgage-backed securities, with more to come. The Treasury Department is covering the losses of Fannie Mae and Freddie Mac. Congress has enacted tax credits to spur home buying, including an $8,000 bonus to first-time buyers that expires Nov. 30 but may well be extended. The Federal Housing Administration has dramatically expanded its mortgage insurance portfolio. The Obama administration offers government-backed refinancing to middle-income homeowners who are up to 25 percent underwater in their current mortgages.

Yet housing remains burdened by a huge backlog of unsold homes, which will probably grow since more foreclosures are on the way. And so the Treasury Department is contemplating yet more help, this time in the form of backstopping state-issued mortgage-revenue bonds, which are federally subsidized in that investors collect the interest tax free. During the boom, the states' housing finance agencies used these bonds to fund about 100,000 low-interest mortgages per year for lower-income home buyers. But since the bust, private bond buyers have shunned them, notwithstanding their tax-free status. At $4 billion this year, mortgage-revenue bond sales are running at a quarter of the pace they set in 2007, according to Thomson Reuters. The plan under discussion would have the government purchase about $20 billion worth of new bonds before the end of the year while insuring $15 billion in existing securities that states otherwise might be forced to redeem because they would not be tradable in the markets.

Administration officials are considering steps to limit the risk to taxpayers by, for example, charging a fee to back those bonds that Treasury does not buy outright. It is also true that, in the past, borrowers of bond-backed mortgages, well selected by the states, have defaulted relatively rarely. Of course, past borrowers didn't face anything like today's unemployment and foreclosure rates. Indeed, those conditions partly explain why private investors have bowed out of the market. As compared to other more direct forms of housing aid, mortgage-revenue bonds also come with high associated costs, in the form of fees for lawyers, rating agencies and underwriters.

Compared to the overall size of the huge housing bailout, this latest policy idea is pretty small beer. It does illustrate, though, that Washington is still in crisis mode when it comes to thinking about a vast, strategic sector of the economy. That's perhaps understandable, but it can't go on indefinitely. The financial crisis was partly the result of years of government-encouraged over-investment in residential real estate. When will the federal government start working on an exit strategy and a new, more rational housing policy -- one in which individual homeownership occupies a central, but less heavily subsidized, position? The answer, apparently, is not yet.

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