Public Proposals for the Future of the Housing Finance System

Testimony Before the Senate Committee on Banking, Housing, and Urban Affairs

Senior Fellow Janneke Ratcliffe testifies before the Senate Committee on Banking, Housing, and Urban Affairs.

In this Friday, February 22, 2013, photo, a
In this Friday, February 22, 2013, photo, a "sale pending" announcement sits atop a "for sale" sign in a home's yard in Richardson, Texas. (AP/LM Otero)

We are here today to discuss not just the future of the housing finance system but also the future of housing and economic opportunity for Americans. As technical as this debate can be, we encourage you not to lose sight of the ultimate impact of the housing finance system on households, communities, and the economy. Research and our lived experiences confirm the link between housing and economic opportunity in this country, from the importance of decent and affordable rental housing and the many benefits of homeownership to the central role of the housing economy on economic vitality.

You’ve asked whether there is a bipartisan way forward on housing finance reform. There is. The Bipartisan Policy Center’s housing recommendations are based on a view shared across the political spectrum that homeownership is a desirable option when viable, and that those who do not buy a home ought to have access to affordable, quality rental housing. More specifically, this group agrees that the 30-year, fixed-rate product is the gold standard for a safe and sustainable mortgage market; that there is a critical need for a reformed multifamily finance system to meet the demand for affordable rental; and that the system must provide access to safe and affordable mortgages for all creditworthy borrowers, including those of low and moderate income.

At this point, the Bipartisan Policy Center’s reform plan is 1 of 18 proposals—including several bipartisan ones—that call for some explicit government support for the segment of the market traditionally served by the government-sponsored enterprises, while only a few plans propose no government role beyond FHA.

In other words, while a couple of outlier proposals still call for withdrawal of all support, we see a very broad consensus emerging. It is time to move on from this question because ironically, until we do so, the government will continue to provide a 100 percent guarantee for the vast majority of mortgages.

It is time to set a clear direction for the future state of the mortgage secondary market—one that considers the interests of all stakeholders and does so in the context of broader, long-term considerations and priorities. This new mortgage finance system should be guided by five overarching principles:

  • Liquidity: The system needs to provide a reliable supply of capital to ensure access to mortgage credit for both rental and homeownership options, every day and in every community, during all kinds of different economic conditions, through large and small lenders alike. The capital markets have come to play an essential role in mortgage finance, but as the past decade so stunningly demonstrated, capital markets on their own provide highly inconsistent mortgage liquidity, offering too much credit sometimes and no credit at other times. These extremes can have a devastating impact on the entire economy.
  • Stability: Private mortgage lending is inherently procyclical. Stability for the market requires sources of countercyclical liquidity even during economic downturns. Stability also requires sustainable products and capital requirements that are applied equally across all mortgage financing channels for the long cycle of mortgage risk.
  • Transparency: Underwriting and documentation standards must be clear and consistent across the board so consumers, investors, and regulators can accurately assess and price risk and regulators can hold institutions accountable for maintaining an appropriate level of capital.
  • Access and affordability: The government guarantees, along with associated regulatory and consumer protections, confer significant benefits to households who can access it—and that should include all creditworthy borrowers. Left to its own devices, participants tend to “cream” the market, leaving perfectly creditworthy lower-wealth, lower-income, or minority segments underserved. With appropriate incentives and tools, these segments can be well-served, to the benefit of the entire system.
  • Consumer protection: Along with regulators such as the Consumer Financial Protection Bureau, any structure supporting the nation’s housing market must share a commitment to ensuring that the system supports rather than undermines the financial health of the consumer.

The future secondary market for residential mortgages must preserve the standard affordable long-term fixed rate mortgage; ensure that a broad array of large and small lenders have access to secondary market finance to help ensure broadly available access to credit in all communities; provide access to reasonably priced financing for both homeownership and rental housing; protect taxpayers; and support economic recovery and the stability of the housing market.

Read the full testimony here.

Janneke Ratcliffe is a Senior Fellow at the Center for American Progress Action Fund.

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Janneke Ratcliffe

Senior Fellow