Mortgage Finance: Progressive Solutions

“We are in the midst of a national financial collapse… a historically unique moment where there is a consensus that substantial reform is needed and the will to do it, but how to do it is where there is disagreement,” said David Min, Associate Director for Financial Markets Policy at the Center for American Progress in his opening remarks at “Imagining a Mortgage Finance System that Works,” a CAP event hosted Monday.

The event began a series of panel discussions over the coming months on the mortgage finance system and how to restructure it to prevent another financial crisis, while still serving the housing needs of our country The event featured remarks from Counselor to the Director of the National Economic Council at the White House Michael Barr, as well as a panel discussion with Center for Responsible Lending President Michael Calhoun; Susan Wachter, co-director of the Institute for Urban Research at the University of Pennsylvania’s Wharton School; Neighborworks CEO Kenneth Wade; and Barry Zigas, the director of housing policy at the Consumer Federation of America.

The panelists discussed a set of progressive principles developed by the Mortgage Finance Working Group, or MFWG, and convened by CAP. The MFWG, which includes Calhoun, Wachter, and Zigas as members, has held weekly meetings to discuss the reform of the housing finance system. Min described such principles as the first step in developing more specific proposals on reforming the mortgage markets, and he highlighted several of the principles including the importance of access to credit and liquidity, risk management and oversight, counter cyclicality, standardization, accountability, systemic stability, and consumer protection. Min noted, however, that “all aspects of the housing system are interconnected.”

The Obama administration has already taken steps to address the mortgage crisis, including the recently released “Making Home Affordable” plan, which Barr noted was first announced in early February. Designed to stabilize the mortgage finance market and provide much-need relief to homeowners, Making Home Affordable was made possible in part because of the “openness to change and fresh thinking that this crisis has generated,” as Barr explained.

Barr also signaled the Obama administration’s agreement with the MFWG principles of access to credit and liquidity, consumer protection, and strong risk management and oversight. These principles are fundamental for a system that, as Barr emphasized, works during “down times as well as up times,” and serves the needs of minority and low-income homebuyers. To achieve these goals, Barr stressed the need for transparency and a model in which “consumer protection is at the very heart of the system rather than an afterthought relegated to second-class status.”

The panel followed up Barr’s remarks with a discussion of the principles they drafted for reforming the mortgage finance system. Access to credit and liquidity is key to both of these goals because, as Watcher emphasized, liquidity is essential to the availability of quality credit, although she noted that, “we have taken it for granted in the U.S.”

Innovation is also crucial to solving the problems of the mortgage system. “To bring in innovation is hard in a system that’s dominated by a few large lenders,” Zigas pointed out, identifying the inherent tension between innovation and standardization. The secondary market, a market where investors buy securities from other investors rather than an issuing corporation, is important as a forum for innovation. Zigas maintained that market reform needs to bring innovation into both the primary and secondary markets, and then link it with standardization.

The system has long been disastrous for lower-income borrowers, even before the current market crisis. Calhoun pointed out that subprime borrowers were already at a one-in-five risk per loan of losing their homes in the period between 1999 and 2006. Yet these subprime loans only lasted for about two to three years. It was really about one out of every three borrowers that were at risk for foreclosure.

Wade built on this argument by criticizing the blame that some have lain at the feet of the Community Reinvestment Act. “Some say we shouldn’t have given loans to people who can’t pay them in the first place,” he remarked. Yet it is possible to create circumstances that create sustainable loans for people and help them get houses they can afford. Wade blamed the lack of transparency in the home-buying process for creating a system that “is stacked against the consumer,” and proposed that, “there must be something that ensures equal access to credit coupled with some reliability and standard of suitability.”

Calhoun said that currently half of all subprime borrowers were at risk of losing their homes. He went on to say that consumer protection, safety, and soundness were critical to turning this crisis around.

The panel considered a model where the mortgage finance system is purely private, but regulated by a government agency. When asked how we can avoid the problems of a purely private market, the panel emphasized standards, consumer choice and protection, and innovation as the necessary solutions. The future of the mortgage finance system has to be a hybrid of government regulation and private innovation.

For more details on this event, please visit the events page.

See also:

• Sustainable Mortgage Modifications by Andrew Jakabovics
• Saving American Homes 101