Well the Obama administration’s proposal(s) for remaking the country’s mortgage finance system has finally arrived. It, to my mind, is both a reminder of the paucity of leadership we currently enjoy as well as an important document around which to frame, hopefully, a private system which delivers unsubsidized mortgages.
As with health care, Obama has once again displayed his preference for allowing Congress to bang out the nuts and bolts of a major policy. He has perhaps taken it a step further this time by offering up a menu of possible structures, lest he be tagged with advocating something that might need a defense in the 2012 elections.
Make no mistake about what’s going on here. This administration was not going to go on record with a hard plan that might well piss off the formidable housing lobby. Better to offer up some choices and hope the Republicans would bite and, therefore, suffer next year. They won’t and that is the reason that like the deficit commission’s report and the report on the causes of the financial crisis this one will also gather nothing but dust.
Still, let’s praise Caesar rather than trying to bury him. There is a lot to like here. First, the three proposals:
Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.
It won’t come as a surprise to you that I favor Option 1. It seems to me that a multi-decade flirtation with the mixed system which we had under the Frannie regime produced extraordinary costs for the taxpayer while delivering homeownership rates that are no better than middle of the pack when compared to other developed economies. Been there and done that should be the watchwords as the inevitable pressure to revert to the status quo intensifies.
Options 2 and 3 seem more or less the same thing with Option 3 representing a de facto return to the old days. The rationale for Option 2 is that we need some sort of mechanism to rescue the mortgage market during the next financial crisis. I’ll come back to that in a second. Option 3 falls back on that argument as well but also holds out the promise of more liquidity and lower mortgage costs in exchange for a significant ongoing participation in the market by the government.
I think that any attempt to build a backstop for the mortgage market in times of financial crisis is a fools errand. The next crisis will most likely come from a different direction and arise from different causes than the last one. Trying to devise a structure to address dislocations it might cause is akin to fighting the last war. Inevitably the solution will be insufficient to the new and unanticipated problems.
One can take it a step further and ask why if we feel the need to prepare in advance to bail out the mortgage market we don’t also feel the need for similar programs to address emergent problems in consumer finance, auto loans and commercial real estate loans. Indeed all of these are as critical to a healthy economy or the rebound from cataclysm. The answer is we know how to nurse these sectors through their illness and have enough experience to know that once the prospect of full meltdown has passed the market tends to heal quickly.
There wouldn’t appear to be any reason why mortgage finance should be any different. The Fed wrote the book on how to save devastated financial sectors during the past crisis. It’s a pretty simple formula. Throw enough money as necessary at the problem, buy up as much debt as is necessary to bring a measure of stability to the effected sector and then withdraw slowly as the need for intervention fades. You can do the same thing with residential mortgages if and when the need arises.
One more thought or two on Option 3. I view it as Frannie Light and suspect that it would eventually morph into some sort of full blown government support for the market. Once you start defending its merits on the facts that it would help preserve the 30-year fixed rate, prepayable mortgage, provide liquidity and reduce overall mortgage financing costs you have opened the door for special interests to force expansion of its reach. After all, those arguments are Mom and apple pie stuff, the sort of goodies that politicians can’t resist delivering.
Let me finish more or less where I started. The administration deserves some props for laying out these options and for being honest about the reality of mortgage rates increasing regardless of the outcome. But, it would have been more to their credit if they had shown the courage to push one of the three in the interest of resolving the issue. They punted to Congress and more particularly the Republicans who will have no interest in putting their heads on the chopping block in advance of the elections. Both sides know that the other would demagogue them to death if they pushed hard on any of the Options.
As such, it is likely that we won’t see any meaningful debate and action until 2013. By then memories will have begin to dull and special interests will have had plenty of time to buy votes and influence the course of legislation. Given that timeline I suspect that Option 3 or worse is what we probably expect.