Tuesday, November 7, 2017 (10:00 AM) – Subcommittee on Housing and Insurance (Committee on Financial Services) Hearing: “Sustainable Housing Finance, Part III”
Under Review: The Need for Housing Finance Reform
The Housing and Insurance Subcommittee held its third hearing Tuesday entitled “Sustainable Housing Finance, Part III,” to further assess views and perspectives on the need to enact a comprehensive housing finance reform.
During the meeting, the panel provided the Subcommittee with views and perspectives on the need to enact comprehensive housing finance reform, the legal, statutory or regulatory impediments to the return of private capital to the housing finance system, and what factors and metrics Congress should consider to reform the housing finance system.
“We’ve heard from those who finance purchases of homes, we’ve heard from those who build homes, and those who help sellers and buyers meet for that buyers slice of the American Dream,” said U.S. House Rep. Sean Duffy (R-Wisconsin) and Chairman on the Housing and Insurance Subcommittee during his opening remarks.
Duffy continued, “We recognized that a home purchase is one of the biggest and most important decisions a person makes, and making sure we have a system that actually works for all Americans is incredibly important because we’ve seen when things go wrong, back in 2008, it doesn’t only impact those who purchase a home, it wrecks havoc on the whole economy.”
U.S. Rep. Dennis A. Ross (R-Florida) said the federal involvement in housing is litigated on the idea that it is not only helpful, but it is necessary.
“For example, a working-class family scrapping to get by, we ask ourselves, how are we helping them?” Ross questioned during the hearing. “What’s striking to me is that we don’t ask a different question, how are we hurting them?”
Other members of the subcommittee had different views, as U.S. Rep. Brad Sherman (D-California) said, “We are going to need government agencies to provide the guarantee—if we are going to have 30-year fixed mortgages for low-income families.”
Sherman continued, “I understand the jurisdiction of this panel is on the housing finance side but our purpose is to make sure homes are affordable and people who have their nest egg invested in homes don’t see that wiped out.”
The panelists included Peter Wallison, Senior Fellow and Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute (AEI), Dr. Mark Zandi, Chief Economist, Moody’s Analytics, Dr. Michael Lea, Cardiff Consulting Services, Alanna McCargo, Co-director, Housing Finance Policy Center, Urban Institute, and The Honorable Theodore “Ted” Tozer, Senior Fellow, Center for Financial Markets, Milken Institute.
As the Subcommittee recognizes that Americans need a housing policy that is sustainable over time, not one that causes endless boom-bust cycles in real estate that harm the economy, panelist McCargo said, “One clear lesson from recent years is that the country needs one solid, interconnected housing finance system that serves all people and protects taxpayers.”
During Wallison’s testimony, he outlined five reasons why he believes the GSEs have impeded the growth of homeownership. One of those reasons included his belief that the enterprises and other housing policies increase housing prices and makes homes less affordable.
“The best and most effective housing finance reform would be to completely eliminate the government’s role in housing finance, and to let private capital and the private sector operate the housing finance system,” Wallison said. “There is nothing about the way the government has managed the housing finance system for the last 50 years that would remotely recommend a continuing government role.”
Additionally, Tozer also emphasized a safe and sound housing finance system that should support the overall reduction of the public capital footprint as more private capital re-enters the system at different points in the primary and secondary mortgage markets.
However, according to Dr. Zandi it is not plausible to completely rid of the current system, but revise it instead.
“Perhaps the least disruptive approach to GSE reform would be for the GSEs to be simply recapitalized and then reprivatized,” Zandi stated during his testimony. “Since Fannie and Freddie were remarkably profitable prior to the crisis, and have consistently been in the black in recent years, the logic for this proposal is that we can simply return to the system that prevailed prior to the crisis.”
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Download the full PDF (Wallison-Testimony-11-7)
Chairman Duffy and Ranking Member Cleaver:
I am grateful to the Subcommittee for the opportunity to testify today. In its invitation letter, the Subcommittee asked for my “perspective on the need for comprehensive housing finance reform, the legal, statutory or regulatory impediments to the return of private capital to the housing finance system and what factors and metrics Congress should consider to reform the housing finance system.”
My view is that the best and most effective housing finance reform would be to completely eliminate the government’s role in housing finance, and to let private capital and the private sector operate the housing finance system. There is nothing about the way the government has managed the housing finance system for the last 50 years that would remotely recommend a continuing government role.
Later in this testimony, I will show that the government’s policies—and particularly those implemented by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac—have done nothing to advance home ownership. In fact, they have seriously impeded the growth of home ownership in the United States and continue to do so in the government conservatorship that currently controls them. But first, I want to describe briefly the relationship between government housing policies and the 2008 financial crisis—a genuine catastrophe for the US and world economy that was caused directly by the US government’s housing policies.
In 1992, Congress adopted a program called the Affordable Housing Goals. These required the GSEs to meet an annual quota of low and moderate income (LMI) mortgages when they purchased mortgages from banks and other originators. Initially, the goal was 30%—that is, in any year, 30% of all the mortgages Fannie and Freddie acquired had to have been made to borrowers at or below median income where they lived.
Josh Rosner says that Peter J Wallison is making up facts. I’ve had limited correspondence with Peter regarding the facts and I thought I’d share Josh’s tweets which dispute Peter’s narrative with facts.
https://twitter.com/JoshRosner/status/927980522508378114
https://twitter.com/JoshRosner/status/927985738867765249
https://twitter.com/JoshRosner/status/927977220475424773
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Elimination outright is not a prudent position. Agree with Rosner these “facts” are misinterpretations of reality. Consider curtailing the GSE activity, mandate LTV and DTI, eliminate any and all credit policy exceptions, lower maximum loan amounts. These guardrails would be a more reasonable suggestion. To suggest that affordable housing goals and the GSE’s were solely or even predominately responsible for the crisis is just biased or worse, uninformed.
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