Obama's next focus of reform: Housing finance
Wednesday, July 21, 2010
After President Obama signs into law an overhaul of financial regulation at a ceremony set for Wednesday, his administration will turn to reforming an area at the root of the financial crisis: the U.S. housing market.
Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.
"In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go," said Raphael Bostic, a senior official in the Department of Housing and Urban Development. "You're not going to hear us say that."
Bostic, who has published leading scholarship on homeownership, added that owning a home has a lot of value, but "what we've seen in the last four years is that there really is an underside to homeownership."
The administration's narrower view of who should own a home and what the government should to do to support them could have major implications for the economy as well as borrowers. Broadly, the administration may wind down some government backing for home loans, but increase the focus on affordable rentals.
The shift in approach could mean higher down payments and interest rates on loans, more barriers to lower-income people buying houses, and fewer homeowners overall, government officials said. But it could also pave the way for a more stable housing market, one with fewer taxpayer dollars on the line and less of a risk that homeowners will not be able to pay their mortgages. And it could spell changes throughout the financial markets, as investors choose new places to put their money if the government withdraws some incentives for investing in the U.S. mortgage market.
The carnage in the nation's housing market may have been the most destructive and enduring element of the recession. Since 2008, the federal government has committed hundreds of billions of dollars, much of it nonrecoverable, to try to keep housing afloat and ensure that borrowers can get loans. Fannie Mae and Freddie Mac, the mortgage-finance giants seized by the government in September 2008, and the Federal Housing Administration have been nearly the only sources of backing for new loans.
Now the Obama administration is beginning to look for ways to gradually unwind the massive government programs supporting homeownership and restore the traditional role of the private sector. Three months ago, the Treasury Department and HUD released seven broad questions about the future of housing. Comments from the public are due Wednesday, and the administration is required by the financial overhaul legislation to offer a proposal for housing reform by early next year, including restructuring or replacing Fannie and Freddie.
The decision to focus more on rental housing and less on homeownership differs in many ways from the Bush and Clinton administrations. President Bush touted an "ownership society" that sought to increase homeownership rates, specifically for low-income people. President Clinton had a "National Homeownership Strategy" that advocated for a specific homeownership rate.
HUD Secretary Shaun Donovan has been most out front in the administration in advocating a new approach. "While we continue to promote affordable homeownership, for many Americans, renting will continue to be the only or preferred option," he told lawmakers recently.
Other administration officials, such as Treasury Secretary Timothy F. Geithner, have also called for a new housing finance system, but have been less explicit about how it might look. He has said he favors government support both for homeownership in general and for low-income people.
But the Treasury has been divided about how to communicate its approach and reluctant to discuss it publicly, as the housing market remains fragile.
Officials in a new Office of Capital Markets and Housing Finance set up in Treasury are studying options for reform, and generally have concluded that federal policy should focus on what they call "sustainable homeownership" and not on simply boosting the homeownership rate.
Andrew Williams, the deputy assistant secretary for public affairs, said not to read too much into the notion that the administration's policy differed significantly from previous administrations. "[Y]ou are overreading some kind of hard pivot here," he said in an e-mail. It's "just a recognition of how much the foreclosure crisis has hurt homeowners."
Williams declined to make a Treasury official available to discuss the administration's housing policy on the record.
Supporters of rental housing say they perceive an early but markedly different tone from the Obama administration. "My impression is that the administration at pretty much every level is serious about a balanced policy," said Vincent O'Donnell of the Local Initiatives Support Corp. "Their purpose is to look at and make more workable rental housing programs."
People on different sides of the debate warn about diverting too far from homeownership policies. "This is confusing to me -- the view that the best way to help someone accumulate savings over time is to subsidize their rent now," said Keith Hennessey, director of the National Economic Council under Bush.
"I want to be careful about the move away from homeownership," said Janis Bowdler of the National Council of La Raza, a Hispanic civil rights group. "We have to define more clearly what we mean by homeownership for low-income families and make sure we don't . . . come to a very simplistic reading of our recent history that it was simply lending to low-income families that got us into trouble."