Earlier this year, President Donald Trump released a memorandum indicating the need to reform the current structure of housing finance. Although some believe this initiative is a distraction, the reality is that housing finance reform has been in the government sights for years. In fact, the current state of mortgage markets was only meant to be a temporary fix after the financial crisis of 2007.
Housing finance reform has been a popular political subject for years. Even before the financial crisis that resulted in the Great Recession, housing finance reform was front and center as a means to increase homeownership. However, it was not until after the financial crisis that touched off in late 2007 that Congress saw the need to make immediate major reforms to the mortgage industry. Although a strategy was mapped out, not everyone agreed on the plan.
One of the first steps taken by Congress was passing the bipartisan Housing and Economic Recovery Act of 2008 (HERA). The purpose of HERA was to be a comprehensive at attempt addressing the identified problems and concerns (at that time) that caused the financial crisis. HERA created the Federal Housing Finance Agency (FHFA) to provide oversight of the Government Sponsored Entities (GSE). Among the goals set by HERA was to “modernize” Federal Housing Administration (FHA) and reduce Fannie Mae and Freddie Mac’s role in mortgage markets. The fate of Fannie Mae and Freddie Mac has been debated ever since.
The subsequent government takeover of Fannie Mae and Freddie Mac all but froze out any private participation in the mortgage markets. A 2010 Congressional Budget Office (CBO) report indicated that 90% of all mortgages were owned by Fannie Mae, Freddie Mac and Ginnie Mae. Some estimate government’s involvement has been much higher when including FHA and VA loans.
Fast forward to March 27, 2019, when President Trump issued a memorandum on the urgency of housing finance reform. Although the memorandum provides a rationale to change the system, the timing couldn’t be any more ideal (to help a seemingly plateaued housing market). The president’s push for reform acknowledges the dominant role of the GSE in mortgage markets without much competition from the private sector. The plan is to reduce taxpayer risk by expanding the private sector’s role. Furthermore, the goal is to “modernize government housing programs, and make sustainable home ownership for American families (our) benchmark of success.”
On Sept. 5, the Treasury Department submitted its plan on housing finance reform. The plan, as described by a Treasury press release (Treasury Department Submits Housing Reform Plan to President; treasury.gov) “includes nearly 50 recommended legislative and administrative reforms to define a limited role for the Federal Government in the housing finance system, enhance taxpayer protections against future bailouts, and promote competition in the housing finance system.”
Although the result of HERA was a government monopolized housing finance industry, it was not the intention. Housing finance reform means returning to a competitive market that includes the private sector. However, it does not imply the end to government participation.
Prior to the financial crisis, the competitive mortgage industry helped a record number of home buyers achieve homeownership. Reforming housing finance markets is key in returning to a stable and reliable housing market across all sectors and price points. Housing finance reform will increase homeownership opportunities for those who have struggled with the prospect of buying a home. And of course, home sellers will benefit from increasing numbers of home buyers entering the housing market.
Dan Krell is a Realtor® with RE/MAX Platinum Realty in Bethesda, MD. You can access more information at www.DanKrell.com