Moving Forward on Housing Reform

Erik S. Lesser/European Pressphoto Agency

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

President Obama set forth a wide array of proposals in his housing policy speech on Tuesday. Some of what he proposed, such as expanded mortgage refinancing, in a sense merely tie a new ribbon around previous schemes that did not go forward.  Other ideas, however, represent worthwhile, if modest, progress toward reforming the housing system that failed so badly in the financial crisis.

The main news in the speech was that the president had kind words about the housing finance reform bill introduced by a bipartisan group in the Senate. This is progress from 2011, when the administration set forth three broad options for reform but did not choose among them. Still, there are an array of difficult choices involved with housing finance reform, including the amount of private capital required at risk ahead of the government backstop, the role of large banks in the new system, the amount and uses of funds dedicated to supporting affordable housing, and the mechanics of the transition away from the current government-dominated system to one with a leading role for the private sector.

With student loans, the president put forward a detailed proposal and this led to rapid convergence with the House and the Senate, and a bill on the president’s desk (which he signed on Friday). On housing finance, the White House is taking the opposite approach by holdings its preferences close to the vest. I think this is a mistake. Indeed, the outcome with the student loans legislation runs counter to the suggestion (often made by Mr. Obama himself) that Congressional Republicans will automatically oppose anything the president puts forward and therefore he should lead from behind.

The president in his speech also highlighted the importance of giving lenders “clarity and certainty” about the rules involved with lending and the legal risks involved with not following them. Mortgage originators have been cautious with lending out of concern that the government would detect rule violations and force them to take back mortgages they thought were covered by a government guarantee.  This is a difficult balance. Rules must be enforced and wrongdoing by banks and other lenders punished. But unclear rules will lead banks to make only the safest loans and thus create an unnecessary hurdle for potential homeowners, making this a fruitful avenue for presidential attention. It was an unfortunate coincidence that Mr. Obama’s message on clarity and certainty was muddled by a lawsuit filed Tuesday by the Justice Department accusing Bank of America of mortgage violations. Again, any wrogdoing should be punished, but with recognition of the unintended consequences for families looking for mortgages.

A noteworthy aspect of President Obama’s housing policy speech and the accompanying fact sheet notices is that the White House word-processing system seems to insert the word “responsible” before “homeowners.” This literary tic illustrates a further difficulty with taking steps to lift the housing market. The president wants to help responsible homeowners avoid foreclosure and refinance into mortgages with lower interest rates, but these steps generally involve some expenditure of taxpayer resources, and it is difficult to avoid having some of the benefits accrue to homeowners who might not be so worthy of government subsidies.

Expanding the administration’s refinancing program, for example, would mean that additional homeowners who are current on their mortgages would have lower monthly payments. This is good news for them, but with the Federal Reserve buying $40 billion of mortgages each month, taxpayers would be on the receiving end of these smaller checks. Similar considerations apply for programs to prevent foreclosures, since it can be difficult to distinguish between people at risk of losing their home from bad luck or abusive actions by financial firms, and others who bought a large house with lots of debt when they could have bought a smaller one with more equity or who took cash out of their home to fuel an unsustainable standard of living. Presumably Mr. Obama wants to support the first set of homeowners and not the second, but the tighter the screening used to qualify for assistance, the less of an impact there will be from government efforts.

The administration has struggled with this balancing act from the beginning, looking to help prevent foreclosures but wary of the political backlash against the government’s writing checks to irresponsible people.  Proposals to expand government refinancing schemes further or to have taxpayers absorb losses for writing down mortgage balances for underwater borrowers might help some additional people at a cost to taxpayers, but they would have been more effective back in 2009 and 2010, when the foreclosure crisis was truly raging. The administration previously sought to find a prudent balance in its housing assistance programs â€" perhaps to its regret.  The approach today is instead to highlight the focus on “responsible borrowers” while working to open the lending spigots wider.

Five years after the worst part of the financial crisis, the housing market is in recovery, with home prices and sales rising, construction on the uptick and foreclosure rates down from the crisis-era peak. Moving forward with housing finance reform is the essential next step to help ward off a repetition of the epic housing bubble and collapse. The White House endorsement of a path forward on reform is thus welcome. But there are difficult decisions to make in reaching a better housing system, as listed above. It would be especially helpful if the administration would put forward its preferences on these choices.