The Obama administration has released a long-awaited housing finance reform plan that aims to return the primary role in the mortgage market to the private sector, cutting back federal support and winding down the operations of Fannie Mae and Freddie Mac.
Between the Federal Housing Administration (FHA) and the two government- sponsored enterprises (GSEs), the federal government has dominated the market in the wake of the housing collapse and the crippling of many private financial institutions, and the Obama administration says that trend has to be reversed.
“The administration is committed to a system in which the private market— subject to strong oversight and strong consumer and investor protections—is the primary source of mortgage credit," Treasury Secretary Timothy Geithner told the Senate Banking Committee.
In its report, the administration offered three options for a continuing, but limited, federal role in housing finance.
Under all three options, the government's primary function would be to provide support for financing for lowand moderate-income borrowers, but two of the options would also provide some general federal support for the mortgage market.
The intermediate proposal would provide a backstop guarantee mechanism to ensure access to credit during another housing crisis. The guarantee would effectively be priced out of the market when private capital is available, but it could be scaled up when needed. Alternatively, the amount of public insurance that could be sold to the private market would be restricted during normal times, but would be increased during times of stress.
Under the third option, the government would provide reinsurance for mortgage securities backed by private mortgage guarantors. The guarantors would have to meet tough capital and oversight requirements, and the mortgages in the securities pools would have to meet strict underwriting standards. The government reinsurance would kick in only if the shareholders of the private guarantors have been wiped out.
The administration plan also emphasizes the need for continued support for affordable housing, including rental housing. One option listed is an expansion of FHA's multifamily mortgage programs, possibly through risk-sharing with private lenders. The report also says the administration will push for a dedicated, budget-neutral financial mechanism similar to the national affordable housing trust fund to support affordable homeownership and rental housing that current policies can't address.
As part of the reform plan, the administration intends to wind down the operations of Fannie Mae and Freddie Mac, which are in government conservatorship, and reduce FHA's share of the mortgage market to a more normal level.
Specific recommendations for curtailing the activity of the GSEs include reducing the conforming loan limits, trimming their investment portfolios by at least 10 percent per year, phasing in a 10 percent down payment requirement, and requiring them to price mortgage guarantees as if they had to meet the same standards as private institutions.
CBO: Raising subsidized tenant rents would save money
The Congressional Budget Office's (CBO's) latest report on ways to cut the deficit says the federal government could save several billion dollars by raising tenant rent payments in assisted housing from 30 percent to 35 percent of income. The increase would be phased in over the 2012-2016 period. Although the report includes a number of budget-cutting options, the CBO, as is its custom, makes no recommendations.
Assuming that federal funding for assisted housing is reduced accordingly, rather than the same amount of money being spent to assist more lowincome families, the CBO says the increase in tenant rent payments would save $9.2 billion in budget authority and $8.3 billion in outlays over the 2012-2016 period and $26.4 billion in budget authority and $25.4 billion in outlays through fiscal 2021.
The five-year outlay savings include about $4 billion in the Sec. 8 voucher program, $2 billion for project-based assistance programs, and $2 billion in public housing.
An argument in support of the change, according to the report, is that low-income families without federal assistance pay about 40 percent of their income for rent. “Furthermore, households that received assistance would continue to benefit from paying a fixed percentage of their income toward housing,” the report says, “whereas unassisted renters with similar family income could confront increases in housing costs relative to their income."
A case for retaining the 30 percent rent-to-income limit, the CBO says, is that housing costs for assisted tenants would rise, putting a burden on very lowincome households.
Another way to reduce government spending, according to report, is to eliminate Community Development Block Grant (CDBG) funding for relatively wealthy communities. This option could be implemented in a number of ways, the report says, such as excluding communities with per capita income exceeding the national average by more than a specified percentage. The report notes, for example, that communities with per capita income above 105 percent of the national average accounted for 23.4 percent of CDBG entitlement funds in 2010.
Without specifying a particular approach, the report says a 20 percent reduction in entitlement grants would save $2.9 billion in budget authority and $1.7 billion in outlays from 2012 through 2016 and $6.1 billion in budget authority and $4.8 billion in outlays through 2021.
One argument in favor of this option, according to the report, is that federal funds shouldn't be used for local development. An alternative argument is that even if such a use is generally appropriate, the money shouldn't go to wealthier communities.
The main counterargument is that excluding higher-income communities from the CDBG program would reduce aid to poorer households in those communities unless the local governments use their own funds to offset the lost federal grants.
On the revenue side, the CBO doesn't include the low-income housing tax credit program as an option for deficit reduction, as it has in the past.
Barry G. Jacobs is editor of Housing and Development Reporter, the nation's premier source for in-depth, factual coverage of all aspects of affordable housing and community development. The twopart publication includes informed reports and insightful analyses in “HDR Current Developments,” and an up-todate compilation of essential documents in the “HDR Reference Files.” Jacobs is also the author of the annually updated HDR Handbook of Housing and Development Law. For more information, call (800) 723-8077.