Housing Finance Reform

by Carla Hill
Tuesday, May 01, 2012

This is why the National Association of Home Builders (NAHB) has announced new framework for reforming the housing finance system.

"Our plan seeks to overhaul the housing finance system to ensure that housing credit is available and affordable in the future and is delivered through a competitive, efficient, sound, safe and stable system," said NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla.

Largely this reform plan is a departure from government run mortgage giants Freddie Mac and Fannie Mae. It focuses, instead, on private mortgage companies that would be governed by prudent underwriting standards as well as adequate oversight and regulation. Freddie and Fannie would remain continue operating until the new system was fully in place.

Loose standards for underwriting were one of the main culprits in the subprime mortgage meltdown that precipitated the housing bust. Predatory lending took advantage of a booming economy and promised buyers "more for their dollar." Many people bought homes that were too expensive with zero money down. They soon saw their low monthly mortgage payments skyrocket as rates rose.

What role would the government have under this new NAHB plan? They would be the guarantors of privately funded insurance. This would work similarly to how the FDIC functions for banks and savings accounts across the nation. This guarantee would mean that mortgage originators would pay premiums to capitalize the insurance fund, which would cover losses and ensure full payment to investors.

"The intent is for the government to be in a secondary position and to be the insurer of last resort in order to reduce the risk to taxpayers," said Rutenberg.

In order to set this new housing finance plan into action, "the system must include private, federal and state sources of housing capital; offer a reasonable menu of sound mortgage products for both single-family and multifamily housing that is governed by prudent underwriting standards and adequate oversight and regulation; and provide a federal backstop to ensure that 30-year, fixed-rate mortgages are available at reasonable interest rates and terms."

According to the NAHB, their housing finance reform blueprint also proposes to:

Restart a carefully regulated fully private mortgage-backed securities system. NAHB believes reforms are needed in the system for rating mortgage-backed securities and is supporting the development of new securities ratings agencies that would use criteria developed by securities investors to assure objective evaluations and avoid conflicts of interest.

Continue the role of the federal government housing agencies. The housing finance support roles of the Department of Housing and Urban Development, Federal Housing Administration, the Department of Veterans Affairs, the Department of Agriculture and the Government National Mortgage Association (Ginnie Mae) would be preserved.

Enhance the position of state and local housing finance agencies (HFAs) as a source of housing funds. The HFAs should have a more prominent housing finance role through the development of original programs for new homes and multifamily rental units involving partnering with federal and private providers of housing capital.

Expand the role of the Federal Home Loan Banks (FHLBanks) in the housing finance system. The FHLBanks should continue their current activities to serve as an ongoing liquidity source for institutions providing housing credit. Existing programs, such as the FHLBanks' mortgage purchase programs, should be enhanced by allowing the banks to move beyond portfolio purchases to securitization.

Repair flaws that produced the housing boom and bust. It is extremely important to continue and complete steps to close the gaps in standards and oversight that allowed and facilitated the improper and illegal activities in financial and mortgage markets. This should be done by undertaking a series of comprehensive reforms to ensure sound mortgage products and prudent underwriting; requiring sound mortgage securities structures and full transparency for investors; and imposing adequate oversight on previously unregulated segments of the mortgage and financial markets.

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