The downturn in the housing market affected more than just the banks, but also the U.S. taxpayers. Nearly two out of every three dollars of mortgage debt is owned, guaranteed, or insured by agencies of the U.S. Government. The credit risk on the balance sheets of these agencies exposes the U.S. taxpayer to substantial risk in the event of a housing downturn.
The mandate to promote home ownership coupled with sub-optimal policies resulted in these agencies taking on excessive credit risk leading up to the 2008 financial crisis. Substantial credit losses from declines in home prices damaged the balance sheets of government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. These companies were effectively nationalized during the 2008 crisis. The U.S. Federal Government was compelled to intervene by making their debt an explicit guarantee backed by the full faith and credit of the U.S. taxpayer. While private capital withdrew from the market, the Federal Housing Administration (FHA) expanded its mortgage insurance program, especially for first-time home buyers, in the depth of the 2008 crisis. Arguably, it might have prevented the housing crisis from getting worse, but the FHA has also been saddled with credit losses and is gradually reducing its participation in the market.
Rare consensus within Washington exists for promoting housing-finance reform, though details on how to implement reform vary. There is little dissension for reducing the role of the Federal Government in the housing market and thus the liability of the U.S. taxpayer. The common vision is to shift the agencies’ role toward being a lender of last resort and reducing credit exposure to last-in catastrophic exposure. Private capital should be the first line of defense in the event of another housing downturn. Policy emphasis would also change from promoting home ownership for all, to attempting to facilitate financing for home owners and renters via financing of new apartment construction.
Difference among various parties pertains to the speed and extent that this transition should occur. Some advocate an immediate unwinding of the federal agencies, though this proposal appears to have little support from majorities in either party. A more gradual unwinding, which to some extent is already occurring, appears more likely. Agencies would cease to hold mortgages on their balance sheets while retaining their role as credit guarantors for third-party investors in exchange for a fee.
The Senate Banking Committee hopes to issue a bill on housing reform by the end of 2013. Timing for deliberation by both houses of Congress is tricky, but it does appear that bipartisan support for the general parameters of housing reform exists. If done in a responsible, gradual manner, housing reform could ultimately reduce risk to the U.S. taxpayer and perhaps lessen the risk of another housing collapse. However, a hasty and disorderly exit of the agencies from the mortgage market could end up restricting the flow of capital, and thus the pace of recovery in the housing market.