U.S. examines private sector's role in ensuring affordable housing
Saturday, August 21, 2010
The Obama administration is grappling over how much to force private lenders to pay for apartments and homes for the poor as it presses ahead with a major overhaul of the government's housing policy, officials said.
The question is among the thorniest facing the administration as it tries to build consensus around a new system that would ensure ordinary Americans have the financing they need for their homes without the government backing nearly every mortgage, as it is doing today.
Most administration officials agree that the government should continue to have a major role in the housing market. But how much federal assistance should be extended to make sure financing is available to low- and middle-income families has stirred debate within the administration. Agreement has yet to form over whether the government should take on this task or whether the private sector should bear some of this responsibility.
A decision, whenever it comes, could have severe consequences. Some say government pressure on mortgage giants Fannie Mae and Freddie Mac to spend a portion of their profits on affordable housing pushed the companies to finance risky loans, adding to the troubles that nearly led to the firms' collapse. The companies' federal regulators, which relaxed the firms' affordable-housing requirements after seizing them, are among those who hold that view.
But without government intervention, it may not be profitable for lenders to make loans to low-income families, and so those people may be unable to get financing.
One option under consideration is simply to require mortgage lenders to provide a portion of their loans to affordable housing, essentially putting the burden on the private sector. Another idea being discussed is to put the onus on government agencies such as the Federal Housing Administration, which makes loans to borrowers who cannot afford to make a standard down payment.
A third choice would be a hybrid of private and public participation. For instance, the government could make private firms pay a fee into a federally administered fund that would subsidize affordable housing.
A senior Housing and Urban Development Department official said that officials are looking at all of their options. "Consideration about affordability and access are going to be really important," the official said. The official, like other sources interviewed for this story, spoke on the condition of anonymity because the plans are still under discussion.
Senior HUD officials lean toward requiring that private firms pay part of their profits to low-income housing. Treasury officials who are also leading the housing-policy discussions have said affordable housing must remain part of government policy, but they have not specified where the money should come from.
"They don't know the exact design of the mechanism they're going to endorse," said Sarah Rosen Wartell, a former HUD official who is contact with administration officials.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said the government must continue to support affordable housing by ensuring that underserved communities get loans and that financing is available to create affordable rental housing. But he added that private firms should not have to meet specific affordable-housing goals while also making a profit.
"I do not want the private-sector entities . . . to have a dual mission," he said. "A better way is to make some part of the profit and make it for an entity to subsidize housing."
Some banking executives said they already accept that the industry will have to pay money toward affordable housing. But they said they prefer to pay a fee rather than become embroiled in decisions about affordable housing itself.
Fannie and Freddie faced the contradictory mission of generating profits while financing loans that caused them losses, said Mike Heid, co-president of Wells Fargo Home Mortgage. A safer and more predictable business for lenders would be to "have a fee for affordable-housing initiatives. . . . You can model that cost in and you can structure the business model," he said.
The Obama administration is required under the Dodd-Frank financial regulatory legislation to make a proposal to overhaul housing finance by January. Frank will continue to hold hearings on the subject in coming months but said he does not plan to offer legislation on his own.
While administration officials have promised fundamental reform, they have said they will maintain a big role for the government to backstop private lending. "It's important to be careful not to throw out the baby with the bathwater," the HUD official said.
A Treasury Department official added that one of the big challenges will be transitioning to any new system. Fannie, Freddie and the Federal Housing Administration now stand behind nine out of 10 new home loans. The Treasury is trying to figure out how to get more private capital into the market so it can move to a system where taxpayer money is not as much on the line.
The official said the administration is wary of causing disruptions while the economy and housing market remain fragile.