Voices

The gulf be­tween those at the up­per ends of the wealth lad­der and lower-in­come Amer­i­cans has wors­ened since the fi­nan­cial cri­sis de­spite tril­lions in sub­si­dies that tax­pay­ers pro­vide for hous­ing.

National Mortgage News - - Contents - BY KAREN SHAW PETROU

with house prices reach­ing new highs each month, it is easy to come to the con­clu­sion that U.S. res­i­den­tial hous­ing has fully re­cov­ered since the depth of the fi­nan­cial cri­sis. How­ever, the hous­ing re­cov­ery is as un­equal as the rest of U.S. in­come and wealth dis­tri­bu­tion.

When it comes to hous­ing, the gap be­tween those at the up­per ends of the wealth lad­der and lower-in­come Amer­i­cans has widened markedly since the fi­nan­cial cri­sis, de­spite the tril­lions of di­rect and in­di­rect sub­si­dies that tax­pay­ers pro­vide to the hous­ing fi­nance sys­tem.

Home­own­er­ship, of course, isn’t al­ways the right de­ci­sion for house­holds at the very bot­tom of the in­come spec­trum, but it’s still the best path to long-term wealth ac­cu­mu­la­tion for younger and low-to-mod­er­ate-in­come Amer­i­cans. With Congress and the ad­min­is­tra­tion set to re­con­sider how Fan­nie Mae, Fred­die Mac, the FHA and Fed­eral Home Loan banks sup­port res­i­den­tial fi­nance, now is the time to as­sess why a mar­ket in which 90% of mortgages are backed by the U.S. tax­payer fails to meet the hous­ing mar­ket’s most ur­gent needs.

Cur­rently, the gov­ern­ment-spon­sored en­ter­prises and the FHA pro­vide back­ing for high-prin­ci­pal loans in “high-cost” ar­eas, where home prices ex­ceed the na­tional me­dian. But in many in­stances, sub­si­dies are be­ing di­rected to ul­tra-ex­pen­sive home pur­chases, tak­ing re­sources away from mortgages at the na­tional av­er­age and more af­ford­able price.

The GSEs are now al­lowed to buy or back loans over $600,000 and ap­proach­ing $1 mil­lion in cer­tain high­cost ar­eas. Loan lim­its are tighter in most of the coun­try, but there too the max­i­mum sup­port al­lowed is not only well above me­dian na­tional ex­ist­ing house prices — about $256,000 — but of­ten far be­yond ac­tual house prices in lower-in­come and/or hard-hit com­mu­ni­ties. In some states, the gov­ern­ment-sanc­tioned lim­its in cer­tain ar­eas far ex­ceed the statewide prices.

Fan­nie and Fred­die have struc­tured por­tions of their mort­gage port­fo­lios into tranches that share risk with rein­sur­ers, hedge funds and other in­vestors. Even so, the GSEs take a first-loss po­si­tion and sub­si­dize risk-share pric­ing. Why not en­cour­age more pri­vate cap­i­tal into equal­ity-boost­ing mort­gage fi­nance by push­ing the GSEs to struc­ture credit risk trans­fers for the mortgages that most need their help?

That the GSEs can sell off much of the credit risk for most of the higher-qual­ity mortgages they hold sug­gests that avail­able pri­vate cap­i­tal can take it on with­out a tax­payer-backed mid­dle­man. The GSEs should only sub­si­dize risk trans­fers and re­tain first­loss tranches for un­der­served mar­kets and the in­no­va­tive prod­ucts needed to meet the needs in those mar­kets.

GSE or FHA back­ing for cash-out re­fi­nanc­ing keeps loan vol­ume up, but it only sup­ports con­sump­tion, not home­own­er­ship. This is be­cause a re­fi­nanc­ing — by def­i­ni­tion — ben­e­fits only a bor­rower who al­ready has a home. Some of this con­sump­tion is nec­es­sary un­der fi­nan­cial stress or as a source of wealth for re­tire­ment or ed­u­ca­tion.

A hous­ing mar­ket that is 90% de­pen­dent on the gov­ern­ment means that tril­lions of dol­lars of gov­ern­ment sup­port go to the types of mortgages that are the eas­i­est to se­cu­ri­tize in huge quan­ti­ties. Th­ese are the least risky loans that sup­port the great­est vol­ume of mort­gage orig­i­na­tion, home­build­ing and real es­tate trans­ac­tions. But this com­modi­tized un­der­writ­ing and de­liv­ery sys­tem ex­ac­er­bates the scarcity of mort­gage prod­ucts sup­port­ing sus­tain­able home­own­er­ship for un­der­served mar­kets. Hous­ing is in­deed an im­por­tant en­gine of U.S. pros­per­ity, but tax­payer sup­port should go first to ill-served bor­row­ers and com­mu­ni­ties, not those who would do well even if forced to go it alone.

Karen Shaw Petrou is a man­ag­ing part­ner at Fed­eral Fi­nan­cial An­a­lyt­ics.

The GSEs should only sub­si­dize risk trans­fers and re­tain first­loss tranches for un­der­served mar­kets and the in­no­va­tive prod­ucts needed to meet the needs in those mar­kets.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.