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.
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.