NY Times February 11, 2011 Administration Calls for Cutting Aid to Home Buyers By BINYAMIN APPELBAUM
WASHINGTON — The Obama administration’s much-anticipated report on redesigning the government’s role in housing finance, published Friday, is not solely a proposal to dissolve the unpopular finance companies Fannie Mae and Freddie Mac. It is also a more audacious call for the federal government to cut back its broadly popular, long-running campaign to help Americans own homes. The three ideas that the report outlines for replacing Fannie and Freddie all would raise the cost of mortgage loans and push homeownership beyond the reach of some families. That fact is already generating opposition in Congress and among groups like community banks and consumer advocates. But administration officials said they had concluded the country could no longer afford to sustain its commitment to minting homeowners. Better to help some people rent. Federal programs subsidized nine in 10 mortgage loans made last year. If the Obama administration succeeds, that could plummet to a mere one in 10 loans by the end of the decade. The government “must help to ensure that all Americans have access to quality housing that they can afford,” the report said. “This does not mean our goal is for all Americans to be homeowners.” In announcing its blueprint, the administration offered a series of options for lawmakers to consider. But as a starting point its ideas pleased and surprised business interests and advocates of smaller government that have long opposed the government’s presence in the mortgage market. “I’m encouraged to see the administration included a number of reform ideas that track closely with my own,” said Representative Scott Garrett, the New Jersey Republican who heads the subcommittee that oversees Fannie and Freddie. Some of the White House’s usual allies, meanwhile, reacted with anger. “Gutting Fannie and Freddie is the most irresponsible housing proposal yet from this administration,” said Representative Dennis Cardoza, a Democrat from the Central Valley in California. “How is Joe Six-Pack ever going to be able to afford a home?” The government built Fannie and Freddie as giant magnets to gather money for mortgage loans, part of an effort that dates to the Great Depression to foster homeownership. The companies attract investors by promising repayment, even if borrowers default. In exchange, investors accept relatively low interest rates. That lets Fannie and Freddie provide money to mortgage lenders at relatively low cost, which lets borrowers pay relatively low interest rates. A long line of presidents have celebrated the success of the two companies in increasing the share of American families that own their homes. But the system works only because taxpayers ultimately are liable. In 2008, the government seized the companies. It has since spent more than $135 billion honoring their guarantees. The Obama administration plans to put the companies out of business by gradually reducing the value of loans they can guarantee and raising the prices they charge lenders. It also plans to require larger down payments from borrowers. The Treasury secretary, Timothy F. Geithner, said Friday at the Brookings Institution that the health of the housing market would dictate the rate of the agencies’ closing. He estimated the process could take five to seven years. “We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market,” he said in a separate statement. If the companies disappear, investors will demand that borrowers pay higher interest rates. But there is wide-ranging disagreement about how much higher. Estimates range from less than half a percentage point to several percentage points. Investors also may be reluctant to provide money for 30-year fixed-rate mortgages, a product that has never existed without government support. The effect on borrowers depends in part on what the government does instead. The report sketches three options without offering specifics or picking a favorite. The administration took a similar approach to health care legislation, adopting the role of moderator as Congress worked out the particulars. The first option would eliminate any government guarantee for middle-class mortgages. Under the second option, the government would offer guarantees to investors mostly in times of financial distress, preserving a steady supply of loans but not reducing interest rates in good times. The third option comes nearest to the current system. The government still would guarantee a broad range of mortgages, but only if lenders first purchased a guarantee from a private insurer. That would limit the government’s exposure — but also the effect on interest rates. The report rejects calls from some conservatives to eliminate federal programs that guarantee mortgages for lower-income families, veterans and farmers. However, it said it would like those programs — the largest of which is the Federal Housing Administration — to guarantee no more than 15 percent of mortgages, down from a current level of about 30 percent. “We do take the view that it would be fundamentally untenable for the country to adopt a model where the government plays no role,” Mr. Geithner said. The report, prepared by Treasury and the Department of Housing and Urban Development, also notes that policies like allowing homeowners to deduct mortgage interest payments from taxable income — an expensive pillar of the government’s housing campaign — encourage people to invest in housing rather than other parts of the economy, and deserve to be reconsidered. The role that federal home ownership policies played in the housing crisis, and particularly the role of Fannie and Freddie, is deeply controversial. Some conservative scholars say that the companies fueled the crisis by financing vast numbers of unaffordable loans. A larger number of scholars say that Fannie and Freddie chased after the bad behavior of other lenders to reclaim market share, and that their acquisition of bad loans — while saddling taxpayers with huge losses — was not a primary cause of the crisis. Many advocates for affordable housing say they cannot understand why the administration has concluded that those errors in judgment are more important than the long-term success of the two companies in making homeownership more affordable. “Instead of cleaning up where Fannie and Freddie went wrong, we’re eradicating a proven system that worked very well for most of its history,” said John Taylor, president of the National Community Reinvestment Coalition. “For those who are working their way up the economic ladder, there is going to be a narrower opportunity for them to enter homeownership.” Sewell Chan contributed reporting. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
