SOURCE: AP/Paul Sakuma

A Stanford University student walks in front of Hoover Tower on the Stanford University campus in Palo Alto, California, February 15, 2012. The rise in student-loan debt could have a negative impact on the housing market, the broader economy, and Americans' future financial security.

The Center for American Progress and Campus Progress submitted joint comments to the Consumer Financial Protection Bureau in response to the agency’s request for information regarding an initiative to promote student-loan affordability. Read the full comment letter here.

We believe that the growing student-loan burden in this country could make it more difficult for families to achieve future financial security and, if left unchecked, could negatively affect the housing market and the broader economy. In our comments to the Consumer Financial Protection Bureau, we explored key characteristics of the growing student-debt burden and its potential impact on borrowers and the broader economy. We also offered recommendations to help contain the amount of student-loan debt incurred and make student-loan debt more manageable.

The rise in student-loan debt affects Americans of all ages

According to the 2010 Survey of Consumer Finances, 45 percent of all American families hold outstanding student-loan debt, up from 33 percent in 2007. While the majority of student debt is held by borrowers under the age of 35, the rise in student debt also affects older Americans. Thirty-six percent of families in a household headed by someone ages 45 to 54, 29 percent of families in a household headed by someone ages 55 to 64, and 13.3 percent of families in which the head of household is between the ages of 65 and 74 hold student debt.

The average student-debt obligation has also risen significantly, increasing by close to $3,000 for households under age 30 and $6,000 for households between the ages of 30 and 39. Student-loan delinquencies and defaults have risen alongside the increase in student-debt burden: Banks wrote off $3 billion in student-loan debts during January and February of this year alone, according to Reuters.

Economic obstacles for borrowers cause a ripple effect

Not surprisingly, declining incomes, rising housing costs, and higher student debt are all having a ripple effect across the broader economy. First, these factors may be delaying household formation. Two million more adults ages 18 to 34 live in a household headed by their parents than before the recession, an increase from 28.2 percent in 2007 to 31 percent in 2011. Moody’s Analytics estimates that each new household leads to $145,000 of economic activity, suggesting that this delay in household formation could be slowing broader economic growth.

Moreover, the delay in household formation and the financial challenges for adults in their twenties and thirties may alter the future of the U.S. housing market. The Bipartisan Policy Center estimates that Echo Boomers—those born between 1981 and 1995—will drive 75 percent to 80 percent of owner-occupied home acquisition before 2020, when Baby Boomers begin to sell off their homes. Yet homeownership rates for young people are among the lowest in decades.

While home prices and mortgage interest rates are both at historically low levels, the tightening of credit resulting from the housing crisis poses a double obstacle to young people with significant debt. First, due to the implementation of new mortgage regulations under the Dodd-Frank Act, lenders are often requiring that homeowners have a 43 percent “back end” debt-to-income ratio to get a loan. In other words, combined monthly housing costs and monthly debt payments must not exceed 43 percent of one’s monthly income in order to qualify for a loan. For those with significant student debt, this debt-to-income ratio cap may well put homeownership out of reach.

Second, even young borrowers who successfully meet debt-to-income ratios may not be able to set aside enough savings for a down payment. The Center for Responsible Lending calculates that median-income families of all ages take nearly 20 years to save enough for a 10 percent down payment and the closing costs for a moderately priced home. Younger workers may take even longer to save for a down payment, given their other immediate financial obligations, or they may simply never reach this goal.

Effects on retirement security

High student debt also threatens retirement security. According to the Center for Retirement Research at Boston College, 62 percent of workers ages 30 to 39 are projected to have insufficient resources in retirement. This is a far higher concentration than older age groups, and it has increased by 9 percentage points between 2007 and 2010. As nearly 20 percent of people in this age group hold more than $50,000 in student-loan debt, this burden could further undermine their ability to save for retirement.

The combination of inadequate retirement savings and the continued existence of housing debt or rent payments in retirement may be particularly damaging for retirees. In fact, families ages 65 to 74 with housing debt carry a median debt load of $70,000. What’s more, nearly 20 percent of households headed by someone age 65 or older are still renting. In short, more than half of families with a head of household who is at retirement age are still dealing with rent or mortgage payments. Historically, families have sought to pay off their mortgage by retirement to be free from shelter payments and have a source of funding for long-term care. This opportunity may be increasingly out of reach for many Americans.

Recommendations

The following recommendations, explored in detail in the full comment, would equip households with tools to better manage student debt so that they have the flexibility to invest sufficiently in their future financial stability:

• Develop a well-designed refinancing program for student-loan borrowers.
• Promote broader access to income-based repayment programs, which offer affordable payment schedules that correspond to the borrower’s income.
• Consider including private student loans under bankruptcy protection.
• Require school certification for private student loans.
• Encourage broader adoption of the college scorecard by postsecondary-education institutions.

Joe Valenti is the Director of Asset Building at the Center for American Progress. Sarah Edelman is a Policy Analyst with the Housing team at the Center for American Progress. Tobin Van Ostern is the Deputy Director of Campus Progress.

SOURCE: AP/LM Otero

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.

CAP Senior Fellow Janneke Ratcliffe testifies before the Senate Committee on Banking, Housing, and Urban Affairs. Read the full testimony (CAP Action)

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.

CAP Senior Fellow Janneke Ratcliffe testifies before the Senate Committee on Banking, Housing, and Urban Affairs. Read the full testimony (CAP Action)

SOURCE: AP/Damian Dovarganes

A single-family home for sale in Los Angeles.

The Center for American Progress, Center for Responsible Lending, Consumer Federation of America, and the National Council of La Raza recently submitted comments to the Consumer Financial Protection Bureau on the Ability to Repay Standards under the Truth in Lending Act (Regulation Z). These comments respond to the bureau’s proposed amendments to the Ability to Repay Standards, which it issued alongside the qualified mortgage rule in January. In particular, the comments addressed two concerns: defining mortgage-lending compensation in a way that protects consumers; and preserving lending programs that offer a gateway to safe and affordable credit. Read the full comment letter here.

Alongside its final qualified mortgage rule—which aims to insure that mortgage originators issue quality loans, and certify that borrowers have the ability to repay the loans they receive—the Consumer Financial Protection Bureau solicited comments on questions that were not resolved by the rule. This document, known as the concurrent proposal, addresses two issues that we believe are critical to the future of safe, sustainable, and affordable access to mortgage credit:

• First, it considers how to define compensation for the purpose of calculating the points and fees cap contained in the bureau’s final qualified mortgage rule. (Under this rule, borrowers who receive mortgages whose points and fees exceed 3 percent of the price of the loan will receive extra legal rights. Therefore, lenders have an incentive to originate mortgages with lower points and fees.)
• Second, it proposes a series of exemptions for specialized mortgage-lending programs and financial institutions that play an important role in ensuring broad access to safe and affordable credit.

Our concerns about defining mortgage-lending compensation arise from the danger of yield spread premiums, or YSPs. A yield spread premium is a method of payment in which the consumer pays a mortgage broker’s fee over the life of the mortgage through an increased interest rate, presumably instead of paying fees to the broker in cash upfront. Yield spread premiums were often abused, and as a result borrowers ended up with higher-cost mortgages. The use of yield spread premiums to push borrowers into higher-cost mortgages was a key part of the subprime crisis that stripped wealth from many lower-income borrowers and borrowers of color.

Because transactions using yield spread premiums are more complex and, therefore, less transparent, borrowers found themselves in loans where they essentially paid the broker twice—first through upfront fees and then through an increased interest rate that provided the funds for the lender to make a backend payment to the broker. Providing vulnerable borrowers more expensive loans may have resulted in greater returns for mortgage brokers, but it left many homeowners with mortgages designed for failure.

Currently, the Consumer Financial Protection Bureau is at risk of defining mortgage-lending compensation in a way that would encourage lenders to make opaque transactions that double-charge consumers. There are steps, however, outlined in the full comment letter, which the bureau can take to instead protect consumers.

Additionally, we strongly support the Consumer Financial Protection Bureau’s proposed exemptions for community-focused lenders, targeting rescue and refinance programs, and small entities as they will provide access to credit for borrowers without unnecessarily adding risk to the system. Because a full exemption from the ability-to-repay standards for some community lenders provides borrowers with very little recourse, however, we support loan limits for these entities as described in detail in the official comment letter.

SOURCE: AP/David Zalubowski

A sign promotes the availability of a new home in Aurora, Colorado, on Sunday, August 19, 2007.

For everyone except hardcore policy wonks and mortgage bankers, it’s natural for eyes to glaze over reading headlines such as “QM rule commentary captures CFPB website.” But numerous arcane incremental policy choices currently being made in Washington to reshape our housing-finance system will determine whether working Americans and their children will be able to move into the middle class, build up assets, and avoid greater dependence on entitlements.

Homeownership is a path to the middle class

Access to homeownership has long been a key component of a family’s ability to build wealth in America. In 2010 the equity in one’s primary home accounted for 29.5 percent of all family assets in the United States. For those families in the middle-income tiers—neither wealthy nor poor, with annual household incomes between roughly $30,000 and $70,000—home equity represented 40 percent to 50 percent of family wealth. And that was at a time when housing values had fallen dramatically after the U.S. housing bubble burst.

While homeownership is not the only path to building assets—and more needs to be done to create widespread equity options for renters—it remains one of the key underpinnings of broadening the base of prosperity.

Historically, homeowners have built wealth in part because each monthly mortgage payment pays down a little more principal on the loan, building equity through a regular “forced savings” program. Moreover, for most of the past 75 years, houses have shown long-term modest price appreciation—a realistic expectation for the future if policymakers continue prudent steps to avoid repeating the housing bubble of the mid-2000s.

The rise of homeownership as a tool to help people enter the middle class was in part a result of post-World War II government policies. Before 1940 the U.S. homeownership rate was just 43.6 percent. But with 4.3 million veterans using zero down payment, low-interest Veterans Administration loans to buy homes between 1944 and 1955, and millions of nonveterans  borrowing with help from the Federal Housing Administration, or FHA, the homeownership rate climbed to nearly 62 percent by 1960. Beyond veterans benefits, the liquidity and stability that the FHA and the government-sponsored enterprises Fannie Mae and Freddie Mac provided to the home-mortgage markets by continuing to attract private investment to fund home loans expanded the average household’s ability to get a long-term, fixed-rate, and safely underwritten loan to purchase a home.

While some conservative commentators still insist that government involvement in the housing market was responsible for the foreclosure crisis, many analysts have debunked this view time and again. It is true, however, that due to the past five years of widespread foreclosures, the federal government has assumed an even larger role in the market by ultimately guaranteeing repayment to private investors buying mortgage securities, maintaining the flow of credit to housing markets to avoid wider economic collapse.

Policy choices will determine who can become a homeowner

There is emerging consensus that the current degree of governmental direct involvement in the housing finance market is neither sustainable nor desirable. Yet it is important to maintain access to affordable credit while reducing the government’s footprint. As banking and consumer protection agencies implement the host of regulations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, they must be careful to  make choices that protect consumers without limiting safe and stable access to mortgage credit for the middle class.

One key issue, for example, is the size of the down payment required to get a mortgage. One regulation that could significantly impact down payments is the so-called risk retention rule and its qualified residential mortgage, or QRM, exemption that will likely be issued by a group of six federal regulators this spring. In brief, for loans to be “securitized”—packaged in large pools and sold as securities to investors—lenders have to hold back on their books 5 percent of the value of loans that do not meet the soon-to-be-released QRM definition, making it less likely that borrowers will be able to get loans that don’t fit this upcoming QRM definition.

The QRM definition will address whether larger down payments of 10 percent to 20 percent of the home purchase price will be required for mortgages to be eligible for securitization, which  brings hundreds of billions of dollars of private investment into the U.S. mortgage market each year. Loans that cannot be securitized generally carry higher interest rates.

QRM rules might seem to be arcane issues of financial-system risk analysis. But a QRM rule that makes lower down payments of 3 percent or 5 percent costly and unattractive to mortgage lenders could prevent a generation of younger workers, as well as lower-wealth communities, including those of color, from attaining homeownership.

The Center for Responsible Lending estimated that a mandatory 10 percent down payment (plus closing costs) would require nearly 20 years of savings for the average American family to buy a home. These higher down payments disproportionately affect the very communities that were most preyed upon during the subprime predatory mortgage-lending wave of the 2000s. Black and Latino households, which tend to have less wealth than white households on average, could pay a down payment of only 10 percent or less in roughly 45 percent of home purchases in 2009, in part because black and Latino households are less likely to receive gifts or use inheritance or proceeds from the sale of previous homes to finance their home purchases.

What’s more, locking so many households out of the market by requiring higher down payments would not have a significant effect on reducing systemic risk, according to a study by the UNC Center for Community Capital. That is because the ability-to-pay rule and its qualified mortgage exemption—another complicated but targeted new regulation that was recently finalized and that will go into effect in January 2014—will already prohibit most of the more toxic and higher-risk lending practices that led to the crisis. The UNC researchers concluded that there would be little benefit—in terms of additional reduction in mortgage defaults—from adding tough down-payment requirements on top of that. In fact, it is likely that excluding so many households from the market will have a negative effect on home values for the long term by significantly reducing demand.

Regulators should not unnecessarily limit access to mortgage credit

No one is arguing, of course, that every family in America can or should buy a home. But unduly narrowing safe and sound access to homeownership perversely undercuts the widely shared goal of broadening each family’s ability to achieve a degree of self reliance and economic independence while minimizing the likelihood of needing direct government assistance.

First, severely narrowing access to the conventional mortgage market will likely mean even greater government involvement in mortgage finance for millions of families. We have seen this over the past few years, as the Federal Housing Administration’s share of the number of home-purchase mortgage loans grew from just 4.5 percent in 2006 to more than 25 percent of all loans in 2012. A large number of borrowers during this time period were ones who, in normal times, would have been served by the conventional mortgage market but who could not qualify either for the higher down payments or the very high credit scores lenders have required in recent years.

The FHA has handled this influx of demand well, financing some 4 million home-loan purchases and roughly 2.6 million refinancings since 2008, which served a critical countercyclical role in keeping home prices from plunging even further after the housing bubble burst. But the direct government insurance that the agency provides is a much greater and more direct federal government involvement in the home-loan market than is recommended by most proposals for a reformed government catastrophic insurance role in the broader mortgage market.

Second, unduly restricting access to mortgage credit will force even those who have steady incomes and desires to be homeowners to remain renters. Their monthly payments will build equity for their landlord but not for their family. And the wealth gap between homeowners and renters is already vast: From 2001 to 2010 U.S. homeowners had on average a net worth of $211,150, while renters averaged just $5,250.

Third, in many rental markets, paying rent results in a higher risk of needing other public assistance. One-quarter of U.S. renters now spend more than half of their monthly income on housing, and that percentage isn’t expected to go down anytime soon. The National Association of Realtors estimates that average rents will increase nationally by 4.6 percent in 2013 and continue to increase by at least 4 percent per year in 2014 and 2015.

As a result, many workers earning even a decent wage will be unable to build up a personal cushion of savings to call upon in times of economic setback—such as job loss, health issues, death of a loved one, and divorce. This asset drain increases the number of households likely over time to need some form of government assistance in times of economic stress. Research shows, for example, that women without assets are more likely to need welfare assistance following marital disruption than women with assets, who are better able to maintain income and independence.

Finally, overly tightening access to homeownership may constrain entrepreneurship, job creation, and educational advancement. Savings in a home have often been a source of capital for entrepreneurship and education. According to a December 2010 study by the Federal Reserve Board of Cleveland, roughly one in four small-business owners in the United States used home equity as a source to finance their businesses before the financial crisis.

The ability to tap home equity has also proven to be a critical factor in access to college. One recent study by Cornell University researcher Michael F. Lovenheim, after noting that 85 percent of U.S. college attendees come from families that own a home, found that higher amounts of parental home equity increased the likelihood that middle- and lower- class students would enroll in college.

Consequently, both small-business activity and college attendance would likely contract in the future if an unduly large share of American families who are otherwise qualified to be homeowners are locked out of the conventional mortgage market. This will only put greater pressure on governmental sources of financing for small business and higher education.

None of this, as noted earlier, argues for making mortgage loans unduly easy to obtain or overly risky. But the process in Washington that is reshaping the lending rules of the future is moving ahead largely in the language of credit markets, systemic risk analysis, and opaque acronyms such as “QRM”—even though the decisions being made will largely affect Americans outside of Washington and financial circles, vastly reshaping where millions of people will live, what they can save, and whether they can achieve the degree of independence that is central to the American Dream.

David M. Abromowitz is a Senior Fellow at the Center for American Progress.

SOURCE: AP/Gene J. Puskar

A home for sale in Mount Lebanon, Pennsylvania, Thursday, January 3, 2013.

CAP Director of Housing Finance and Policy Julia Gordon testifies before the House Committee on Financial Services. Read the full testimony (CAP Action)

Good morning Chairman Hensarling, Ranking Member Waters, and members of the committee. Thank you for the opportunity to testify today about the role of the Federal Housing Administration in our mortgage insurance market.

The Federal Housing Administration is a government-run mortgage insurer. It doesn’t actually lend money to homebuyers but instead insures the loans made by private lenders, as long as the loan does not exceed a certain size and meets strict underwriting standards. In exchange for this protection, the agency charges upfront and annual fees, the cost of which is passed on to borrowers.

The FHA was established in 1934 to help promote long-term stability in the U.S. housing market. Emerging from the foreclosure crisis that occurred during the Great Depression, FHA transformed housing finance by demonstrating how long-term, fixed-rate mortgages can help middle-class families build long-term economic security even through uncertain economic times. FHA was integral in transforming the standard mortgage from a 50 percent LTV, short-duration loan that required frequent refinancing to a 20 percent down, long-term, fixed-rate mortgage.

In the almost 80 years since, FHA has helped more than 40 million creditworthy families realize the benefits of homeownership and has developed a niche of providing low-down-payment loans through its single-family programs to creditworthy, lower- wealth, and otherwise underserved borrowers.

CAP Director of Housing Finance and Policy Julia Gordon testifies before the House Committee on Financial Services. Read the full testimony (CAP Action)

SOURCE: AP/ David J. Phillip

A foreclosed home for sale in Spring, Texas. A congressional refusal to lift the debt ceiling will increase housing costs and depress the market.

Another looming showdown over the debt ceiling—the amount the federal government can borrow without further congressional approval—could derail one of the few bright spots in our fragile economic recovery: the housing market.

If conservatives in Congress refuse to allow the government to honor its financial obligations by borrowing money, investors will likely lose faith in the government and demand higher interest rates for Treasury bonds. Those bonds are the benchmarks for many other U.S. interest rates, including many mortgage rates. That means the cost of borrowing money to buy a house will increase, which could depress the housing market and slow our economic recovery.

The housing market accounts for only 3 percent or 4 percent of total U.S. spending,[1] but it has a disproportionate importance to economic recovery. Spending on new homes typically rises quickly in a recovery because households usually feel more upbeat about their own prospects at the start of a recovery than during the preceding recession. These households then start to put more money into longer-term projects such as buying a new home. These actions ripple through our economy in forms such as more construction and construction-related jobs and increased spending on other items such as furniture and household appliances.

This column first explores in greater detail why a congressional refusal to lift the debt ceiling will increase housing costs and depress that market. It then looks at why it’s so important to the overall economy that we maintain a strong housing recovery.

Congressional failure to raise the debt ceiling will harm the housing market

Estimates show that the federal government will reach the debt ceiling at some point in the middle of February. Failure to raise the debt ceiling means the government will have to immediately default on some of its debt obligations. Once the debt ceiling is raised, the government will return to the global financial markets to borrow more money. If the debt ceiling isn’t raised, investors will be once bitten, twice shy in the future about lending more money to the U.S. Treasury. The federal government will have to offer higher interest rates to entice lenders into lending more money after a default, which would be automatically caused by a failure to raise the debt ceiling, even if it is just temporary.

Interest rates on treasury bonds will go up if Congress refuses to raise the debt ceiling and the government defaults on its debt payments. Those interest rates on government debt are the benchmark for many other U.S. interest rates, including many mortgages. I estimated in 2011—an estimate that is still valid—that a 0.5 percent increase in the government’s interest rate could result in a 0.66 percentage point jump in mortgage rates. Higher mortgage rates will lead to fewer mortgages and much less housing spending. My estimates suggested that a 0.66 percentage point increase in the mortgage rate could reduce new home sales by between 41,000 and 48,000 over the course of one year—equal to about two-thirds of the growth in new home sales in the 15 months from June 2011 to September 2012, when the housing market began its recovery.

Fewer new-home sales will have serious ripple effects, resulting in less economic growth and fewer jobs being created. Fewer home sales lead to lower house prices and thus slow future home sales even further, since past house-price increases are a key driver of home sales. Fewer home sales means less construction and related jobs, and thus even less demand for housing. This devastating cycle will slow the economy markedly.

Maintaining a strong housing market is crucial to the overall economy

Maintaining momentum in the housing market is particularly crucial right now. The bursting of a massive housing market bubble got us into the Great Recession, replete with record foreclosures, widespread bank failures, a double-digit unemployment rate, and shrinking economic growth. After the housing market was depressed and generally in decline over the first two years of the recovery that started in 2009, it is finally gaining steam and has substantially contributed to economic growth since the middle of 2011. The newfound momentum in the housing market has allowed the economic recovery to continue, despite massive headwinds such as a lingering European economic crisis and higher global oil prices.

Maintaining the housing-sector recovery would boost economic and job growth, as it has in the early stages of past recoveries. Housing spending on average contributes 9.3 percent to economic growth during the first three years of a recovery, but it only contributed 2.5 percent to economic growth in the first three years of this recovery. That is, the economy could grow about 10 percent faster than it otherwise would—say at 3.3 percent instead of 3 percent—for the coming years due to the direct effects of spending on new homes.

The effect on economic growth would likely even be larger than that. Direct housing spending will result in spending in other parts of the economy, as construction and related employment increases and as people spend more money on items related to new homes such as furniture.

The housing market also has a lot more room to grow. Housing spending in September 2012 amounted to only 2.4 percent of gross domestic product—well below its historical average of 4.7 percent prior to the Great Recession. Housing spending has on average grown by 41.2 percent during the first three years of an economic recovery, compared to only 10.3 percent during the first three years of this recovery. The housing momentum could continue and substantially strengthen our economic revival, but Congress must raise the debt ceiling to enable this outcome.

Not raising the debt ceiling quickly and unconditionally is economic malpractice that could derail a modest economic and jobs recovery. Political ideology should not trump the well-being of the U.S. economy and the labor market. Congress needs to act fast to raise the debt ceiling so that the economy can maintain and even gain more steam in the coming years.

Christian E. Weller is a Senior Fellow at the Center for American Progress and a professor in the Department of Public Policy and Public Affairs at the University of Massachusetts Boston.

[1] All figures in this column are based on the author’s calculations of the Bureau of Economic Analysis data.

SOURCE: AP/Paul Sakuma

As we chart the path to housing finance reform in the coming months, we must pursue approaches that create a lasting 21st-century finance system and meet the needs of both renters and homeowners.

Endnotes and citations are available in the PDF version of this issue brief.

Home prices have risen for six consecutive months, leading many to conclude that the U.S. housing market is finally on the road to recovery. But any mention of a broad “housing recovery” ignores the country’s more than 100 million renters—roughly a third of the U.S. population—whose economic future is far less rosy.

Indeed, America’s renters face a mounting, long-term affordability crisis. Demand for rental housing has skyrocketed in recent years, thanks to demographic changes and a hangover from the ongoing foreclosure crisis. Meanwhile, production of new rental units has failed to keep up, causing rents to climb more than 4 percent in 2012, while middle-class wages have stagnated.

As a result, one in four renters now spend more than half of their monthly income on housing—a sharp increase in the decade since 2001. And that percentage isn’t expected to go down anytime soon: The National Association of Realtors estimates that average rents will increase nationally by 4.6 percent in 2013 and continue to increase by at least 4 percent per year in 2014 and 2015.

How have policymakers responded to this growing crisis? The picture is mixed at best, with rental housing often an afterthought in the debate over the future of mortgage giants Fannie Mae and Freddie Mac.

We can no longer afford to ignore the problems facing our country’s renters. This issue brief provides background on today’s rental affordability crisis, explains the federal government’s critical role in the rental market, and lays out the need for stronger government support for the rental market going forward—in particular a limited and carefully crafted insurance backstop role supporting the flow of private capital into apartment financing.

What fueled today’s rental affordability crisis?

In the past few years, the percentage of Americans who are renters has risen to almost 35 percent—the highest rate since 1995. In fact, the United States added 1 million new renter households in 2011—the largest annual increase since the early 1980s.

There are a number of reasons for the increase in rental demand. First, our country’s two largest generations—the aging Baby Boomers and Millennial youth—are now entering the two age groups most likely to rent: retirees and those in their younger 20s coming into the housing market.

Second, household formation—the measure of individuals and families looking for a separate place to live—is growing at its fastest pace since the Great Recession began, with more than 1.1 million new households formed between September 2011 and September 2012.

Third, the ongoing foreclosure crisis has forced millions of families to shift from homeownership to renting, especially in communities of color and among working-class homeowners who both suffered disproportionate losses of homes and wealth during the Great Recession. According to the San Francisco Federal Reserve, it could take more than a decade for many of these families to hope to return to homeownership, during which time they have no option but to rent.

Fourth, mortgage credit is less accessible than at any time in the recent past. This is paradoxical, as depressed home prices and record-low interest rates make owning a home more affordable than ever. According to Federal Reserve Chairman Ben Bernanke, however, “overly tight lending standards may now be preventing creditworthy borrowers from buying homes.” In August 2012, for example, a typical rejected applicant for a loan backed by Fannie Mae or Freddie Mac had a credit score of 734 and a down payment of 19 percent—a quality credit profile by historical standards.

Production of new rental units, however, has not kept pace with this increase in demand. According to Harvard’s Joint Center for Housing Studies, as the number of low-income renters grew by 2.2 million over the past decade, the number of adequate and affordable rental units actually decreased. Analysts project that the current pace for rental construction will fall well short of the production needed to meet increased demand between now and 2015. As a recent Freddie Mac analysis notes, there will be a net 1.7 million new renters between 2011 and 2015, but the United States is currently only producing about 200,000 new multifamily units per year. Making the problem worse, analysts predict that there could be as many as 2.3 million more new renters between 2015 and 2020. The result will be an increasingly tight rental market and higher rents for many Americans.

A glut of vacant single-family homes—one of the many byproducts of the prolonged foreclosure crisis—could help narrow this gap. But converting these homes to rentals will only help certain groups of renters—typically middle-class and/or middle-aged families that may have been homeowners prior to a foreclosure. Many foreclosed homes are in outlying suburbs or overbuilt markets—where demand is much lighter—and economically distressed areas—where there is little housing demand due to the mass departure of jobs.

But the populations driving demand for rentals—namely the cohort younger than age 25 heading out on their own, the aging Baby Boomers downsizing their housing, and immigrant families forming new households—are more likely to seek out rental housing in urban areas and rapidly recovering areas where jobs are most plentiful. As noted by the Joint Center for Housing Studies, “Singles and householders over age 65 are most likely to rent in larger multifamily buildings in center cities or suburbs. Renters who are married with children are most likely to live in single-family detached homes.”

As a result of this mismatch of supply and demand, rents in a wide number of markets have risen rapidly in recent years. In 2011 average rents nationwide rose 4.7 percent over the prior year for professionally managed properties with five or more units. This increase was well above inflation and double the 2.3 percent average rent increase of 2010. It is increasingly hard to find an apartment, as well: Vacancy rates have fallen from 8 percent at the end of 2009 to 4.7 percent as of the second quarter of 2012.

Meanwhile wages for the vast majority of workforce renters remain fairly stagnant, setting the stage for a broad affordability crisis. Fifty-three percent of renters now pay more than 30 percent of their household income for their housing, while 27 percent of renters pay more than half. These are both sharp increases in the numbers of cost-burdened households since 2001, when 40 percent of renters paid more than 30 percent of their household income for their housing, and 20 percent paid more than half.

These increasingly unaffordable rents depress demand for goods and services beyond the housing market. One analysis found that lower-income families in unaffordable housing units spend 50 percent less on clothes and health care, 40 percent less on food, and 30 percent less on insurance and pensions compared to families in affordable units.

The government’s critical role in financing rental housing

We are reaching a crossroads in multifamily housing policy. Roughly 4 million apartment units were built from the 1970s through early 1980s using a variety of federal programs begun in the Nixon administration, including the Section 8 rental assistance program and the Section 236 mortgage program. Many units are approaching or have reached the end of their subsidy periods—the time period during which the rents must remain affordable—leaving many lower-income tenants at risk of sharp rent hikes. Another 1 million rental apartments produced under the low income housing tax credit program will soon be more than 15 years old, meaning that their affordability restrictions will soon expire. Together these nearly 5 million apartments represent roughly 15 percent of the nation’s apartment stock, as well as a major public investment.

In addition to direct subsidy programs, the federal government for decades has supported a liquid and stable multifamily housing market through Fannie Mae, Freddie Mac, and the Federal Housing Administration. Specifically, Fannie and Freddie—both under government conservatorship since 2008—purchase conforming multifamily mortgage loans, package those loans into pools sold as mortgage-backed securities, and guarantee timely payments on those securities to outside investors. Fannie and Freddie also hold some multifamily loans in their own investment portfolios. Through these actions, Fannie and Freddie play a crucial role in making mortgage credit available under terms and at prices that put sustainable homeownership within reach for most American families.

In good economic times, Fannie and Freddie tend to back a smaller portion of the multifamily market. In 2007, for example, the companies combined for just 30 percent of multifamily loan originations, as private lenders and investors were eager to finance a robust rental market.

In times of financial gridlock and market downturns, however, Fannie and Freddie step in to keep the rental market afloat. Most recently, as private investors fled the housing market in 2007 and 2008, Fannie and Freddie’s share of the multifamily market shot up to counter the rapid disappearance of private financing before easing back. (see Figure 1)

Without the availability of government-backed credit for multifamily mortgages, the rental market would have completely collapsed in the wake of the financial crisis. In 2009 Fannie and Freddie facilitated 85 percent of all multifamily loans, tripling their share of the multifamily loan market from two years earlier. The institutions continue to play a key role in financing multifamily loans today, and supported 57 percent of total multifamily loans in 2011.

Even with Fannie and Freddie increasing their lending to support the market, multifamily unit construction dropped precipitously, from 284,000 starts in 2008 to 109,000 in 2009—the lowest number in at least 30 years. If the rental market relied entirely on private financing without any government-backed insurance, it is highly likely that many of the hundreds of thousands of rental units built since 2008 would not have been built or improved through refinancing capital improvements. Without Fannie and Freddie attracting private capital to fund ongoing apartment lending, the loss of several hundred thousand additional apartment-construction starts since 2008 would have further pressured rents to shoot up, and thousands of much-needed construction jobs would also have been lost during the downturn. As a result, the current affordability crisis would be an economic catastrophe.

Not only did Fannie and Freddie provide multifamily financing when the private market without any government backstop was unable or unwilling to do so, but their loans performed far better than most of those originated in the private market. Specifically, Fannie and Freddie experienced delinquency rates of 0.45 percent at the end of 2009—14 times lower than default rates for private-label Commercial Mortgage Backed Security multifamily loans (6.5 percent), and 11 times lower than the default rates for commercial banks’ multifamily loans (5 percent) at the same time.

Additionally, Fannie and Freddie continued to offer loans to the full range of markets in cities across the United States during the downturn of the past five years, including loans for small apartment buildings and in smaller markets not as popular with many institutional private lenders. Financing this market is critical to providing decent workforce rental housing, as buildings with 5 to 50 apartments provide homes for more than one-third of the renters in the United States, and in many cities and towns they serve as the primary rental housing stock for moderate-income families.

Policymakers need to focus on the U.S. rental market

A healthy market for decent rental housing requires wide access to multifamily mortgages under a range of market conditions. This financing spurs the construction, maintenance, and resale of apartment buildings, expands supply where there is pent-up demand, and helps keep rents more stable for families at all income levels.

In recent years multifamily financing has relied heavily on government support. Without the availability of government-backed capital from Fannie Mae and Freddie Mac, as well as loans insured through the Federal Housing Administration, the entire rental finance market would have ground to a halt in the early years of the financial crisis. Such financial instability in the rental market would have had dire consequences for low- and moderate-income families and communities across the country.

Yet some policymakers today are considering significantly scaling back government support of housing finance in general, including for multifamily housing. Some are even calling for the federal government to withdraw from Fannie and Freddie’s multifamily business entirely. One critical example is the Federal Housing Finance Agency—the regulator that oversees Fannie and Freddie—which appears poised to pursue plans to privatize the multifamily mortgage market. Earlier this year the agency announced that it was reviewing the economic impact of removing the government guarantee on multifamily mortgage-backed securities issued by Fannie and Freddie. This proposal could reduce the amount of construction of new rental units, which would lead to increased rents for millions of low- and moderate-income families. This and similar congressional proposals for withdrawals of all government support for apartment finance would be a big mistake.

Lawmakers should instead focus on smart reforms to the way we finance multifamily housing in the United States. The Center for American Progress has put forth a plan for preserving a stable and liquid secondary market for multifamily mortgages funded by private investment capital, envisioned as part of a broader effort to reform Fannie Mae and Freddie Mac. Among other things, the plan includes an explicit, privately paid for, and limited guarantee on certain multifamily mortgage-backed securities issued by private firms, provided that the underlying loans meet strict underwriting, loan-type, and size requirements. (Unlike the past implicit federal guarantee of the debt and equity of the government-sponsored enterprises as corporate entities, neither the debt nor equity of the private firms themselves would be guaranteed by the federal government. Instead, any government guarantee would be limited just to payments to the purchasers of the mortgage-backed securities issued by such private firms.)

In addition, to assure that renters benefit from any government backstop to the apartment finance market, the plan proposes that at least 51 percent of the rental housing units financed in the overall portfolio of such private firms for a given year have rents that are affordable. In this context, the plan would define affordable as rents below 30 percent of the income of occupants whose incomes are at or below 80 percent of local median income.

While most analysts agree that a healthy multifamily market requires a strong government role, there is significant disagreement on the issue of an explicit government guarantee. When the Center for American Progress recently reviewed 21 plans for mortgage market reform, only eight maintained an explicit guarantee on multifamily securities—and most of those plans simply mentioned the rental market in passing.

One-third of Americans, including many of the most vulnerable in our society, rely on the rental market for their housing. This sector cannot remain an afterthought in discussions over the future of the housing market. As we chart the path to housing finance reform in the coming months, we must pursue approaches that create a lasting 21st-century finance system and meet the needs of both renters and homeowners.

David M. Abromowitz is a Senior Fellow at the Center for American Progress.

SOURCE: AP/Sue Ogrocki

A home is seen for sale in Oklahoma City on Friday, September 21, 2012.

The Federal Housing Finance Agency—the regulator that oversees mortgage giants Fannie Mae and Freddie Mac—recently requested comments on its plan to create a single platform through which Fannie, Freddie, and potentially private actors would issue pools of mortgage-backed securities. (The majority of mortgages in America, once issued, are sold to investors in the form of securities—the market in which this is done is known as the “secondary mortgage market.” The existence of this secondary market enables many Americans to have access to mortgage credit at reasonable rates.)

Currently, Fannie and Freddie use different systems to perform the tasks necessary to securitize mortgages, such as aggregating mortgages into pools and validating data. The agency’s proposal not only aims to align Fannie and Freddie’s practices, but also to create an infrastructure for securitizing mortgages that can be compatible with a number of potential future states for the housing finance system. In response, the Center for American Progress and its Mortgage Finance Working Group submitted comments on December 3, which were co-signed by several organizations. Below is a summary of those comments.

In January 2011 the Mortgage Finance Working Group released its proposal to reform the secondary mortgage market entitled “A Responsible Market for Housing Finance.” Our plan builds off of five guiding principles for any effort to responsibly wind down Fannie Mae and Freddie Mac and bring private capital back into the mortgage market:

• Liquidity. Provide participants in the capital markets with the confidence to deliver a reliable supply of capital in order to ensure access to mortgage credit, every day and in every community, through large and small lenders alike.
• Stability. Rein in excessive risk taking and promote reasonable products backed by sufficient capital to protect our economy from destructive boom-bust cycles, such as the one we are now struggling to overcome.
• Transparency and standardization. Require underwriting, documentation, and analytical standards that are 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.
• Affordability and access. Ensure access to reasonably priced financing for both homeownership and rental housing.
• Consumer protection. Ensure that the system supports the long-term interest of all borrowers and consumers and that it protects against predatory practices.

We believe that the proposed securitization platform could serve as a critical piece of infrastructure to achieve these goals for mortgage market reform. The platform can potentially help private capital return to the market by lowering barriers to entry. Harmonized contracts and clear disclosure and servicing requirements will help standardize products, protect consumers, and bring greater transparency to the secondary mortgage market.

Additionally, if designed carefully to preserve the “To Be Announced” market—a type of futures market for mortgage-backed securities that allows lenders to provide consumers with interest-rate commitments or “rate locks” on their mortgage interest rates before the final mortgage is signed and sealed—the platform can help bring liquidity, stability, and transparency to the market and ensure that all borrowers have access to safe and sustainable mortgage products. We believe the To Be Announced market is an important component of any future system of mortgage finance because it supports a highly liquid and transparently priced mortgage finance market, lowers mortgage rates, and enables consumers to get “rate locks” when shopping for a mortgage.

With those goals in mind, we respectfully submit the following broad recommendations:

1. Maintain the securitization platform as a government utility (not a privately owned asset) with strong oversight from the Federal Housing Finance Agency in coordination with other federal agencies

The Federal Housing Finance Agency appears to be agnostic about who controls the securitization platform in the long term, stating that it could “possibly [be] offered to the market as a form of utility.” We strongly recommend that the platform be maintained as a government utility, meaning the government would allow private actors to use the platform in exchange for a fee. In our view, this would facilitate active and responsible management by an impartial and empowered intermediary, avoiding conflicts of interest and ensuring that all rules are being followed.

The recent housing crisis demonstrated that private financial institutions are poorly suited to regulate themselves in the mortgage-backed securities market. In our view, the agency has the infrastructure and expertise to provide oversight to the utility for Fannie Mae and Freddie Mac, and it is possible that with more resources and authority, it could potentially play a similar role with respect to private issuers, depending on how the system evolves.

2. Require that all mortgage-backed securities offered in the public securities market be issued through the securitization platform

To the extent possible, we recommend that all mortgage-backed securities offered in the public securities market be issued through the government-run platform, regardless of the issuer. Issuing all securities through the platform would promote an efficient, stable, and liquid mortgage market and prevent the development of a “shadow banking” system that could circumvent the standards set for the platform. A single platform would also help level the playing field among large and small issuers of private mortgage-backed securities, promoting responsible competition.

3. Charge users two separate fees: one to cover administrative costs and another to fund programs that expand market access

The proposed securitization platform has the potential to be a very valuable asset. When fully operational, the platform could bring significant savings to future mortgage-backed securities issuers, guarantors, and investors by offering uniform contracts, reliable bond administration, advanced data management, and responsible monitoring.

The federal government must be adequately compensated for these services. Clearly, all participants should have to pay a fee to cover administrative and other costs associated with creating and maintaining the platform, ensuring that the platform is self-sustaining and does not depend on congressional appropriations.

We also believe that broad access to affordable and sustainable mortgage credit must be a primary goal of any reform effort. In the Mortgage Finance Working Group’s plan for market reform, we propose the creation of a Market Access Fund to help test new products and promote access to mortgage finance for traditionally underserved populations. The proposed platform could capitalize this fund through an assessment on all mortgage-backed securities issuances with a separate, small strip on all mortgages bundled through the platform.

4. Adopt strong, loan-level disclosure requirements for the mortgage-backed securities market

During the housing bubble, regulators and investors were often kept in the dark about the risks in private-label mortgage-backed securities due to flawed and often fraudulent data. In the future market, more granular and reliable information on product pricing and loan-level risk will force all market participants to do their business in the light of day, while helping the Federal Housing Finance Agency and other regulators mitigate fraud and abuse.

We commend the Federal Housing Finance Agency for proposing more robust security- and loan-level disclosures as part of the securitization platform, and we urge loan-level disclosures whenever feasible. We recommend that all essential loan-level disclosures be available to the first-loss entity at the time of delivery of the security (or as soon as practically possible).

We also recommend that information on borrower race, gender, nationality, and geography be collected and that regular reports eventually be made available at no cost to the public in an analyzable format—or at least to researchers upon request. This will help regulators, researchers, and concerned citizens track whether market participants are creaming, discriminating, or otherwise denying mortgage credit to certain creditworthy borrowers. As mentioned above, such openness and transparency is critical to a well-functioning and equitable mortgage market.

5. Ensure that the new infrastructure can facilitate advanced loan monitoring and loss-mitigation activities

When the Federal Housing Finance Agency rejected the Treasury Department’s offer to help pay for principal reductions on Fannie- and Freddie-backed loans, the agency cited system limitations as a key factor. Many of the systems related to these operational complexities, including servicing standards, technology infrastructure, data management, and monitoring protocols, will be revamped as part of the proposed securitization platform. Since the agency is already planning to make these investments, the agency should devote any additional resources necessary to addressing the aforementioned system and operational limitations, with a particular focus on loss mitigation.

Administrative burden should no longer be able to serve as an excuse for neglecting critical foreclosure prevention activities. The proposed platform is a promising opportunity for the agency to take steps to meet its stated conservatorship goal to “maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.”

In conclusion, we believe that the Federal Housing Finance Agency is on the right path with its plan to establish a single securitization platform, and we appreciate the agency’s stated goal to design a platform that is “consistent with multiple states of housing finance reform” and “capable of working well with or without various degrees of government involvement.” It is crucial for the Federal Housing Finance Agency to continue to involve a broad range of stakeholders as the process moves forward.

The Mortgage Finance Working Group is a group of housing finance experts, affordable housing advocates, and leading academics who have been meeting since 2008 to better understand the causes of the mortgage crisis. The group was joined in this effort by the Consumer Federation of America, the National Council of La Raza, and the National Housing Conference.

Download the full comment letter here (pdf)

SOURCE: AP/Rich Pedroncelli

A bank-owned home is seen for sale in Sacramento, California, Wednesday, July 2, 2008.

The Federal Housing Finance Agency, the regulator that oversees mortgage giants Fannie Mae and Freddie Mac, recently announced plans for the companies to charge higher fees on mortgages it securitizes and guarantees in five states—New York, Connecticut, Florida, Illinois, and New Jersey—because of long foreclosure timelines. According to the agency, it takes significantly longer to complete a foreclosure in those states compared to the rest of the country, which leads to higher costs for Fannie and Freddie. The fee targets state laws that the agency says prolong foreclosure timelines—many of which protect homeowners—such as requirements that foreclosures be pursued through the courts and rules governing mortgage servicer behavior.

In response, the Center for American Progress submitted comments for the public record, which were co-signed by several groups and individuals. Below is a summary of those comments. The official comment letter can be downloaded here.

We appreciate the importance and complexity of the Federal Housing Finance Agency’s mandate to preserve the assets of Fannie Mae and Freddie Mac, protect taxpayers from excessive losses, and promote a liquid and resilient U.S. housing market. Setting a financially responsible guarantee fee—the fee that Fannie and Freddie charge lenders for their services, including guaranteeing the payment of principal and interest on securities—is one of the agency’s many critical responsibilities.

In addition, we recognize that foreclosure timelines extending long beyond the time periods required by state law can have a harmful impact not only on investors but also on neighborhoods and families. Unnecessary foreclosure delays can postpone the disposition of abandoned homes or homes that are not properly maintained, which contributes to neighborhood blight, the spillover costs associated with such blight, and the unavailability of housing stock for new families.

At the same time, a rush to foreclosure without an opportunity or effort to engage in loss mitigation also damages investors (such as Fannie and Freddie), neighborhoods, and families. In many cases, a homeowner will prove eligible for a loan modification that has a positive net present value for the investor.

Even when a loan modification is not possible, other foreclosure alternatives result in a greater recovery by the investor than a foreclosure sale and require no subsequent foreclosure-related expenditures. These alternatives include:

• Short sales—home sales where banks and investors agree to sell a property for less than the amount owed to them in order to avoid the foreclosure process
• Deeds-in-lieu—situations where borrowers surrender their deeds on a property to lenders in order to avoid foreclosure

What’s more, increasing costs to new homebuyers and making home buying unaffordable may well derail a housing recovery that will help investors, neighborhoods, and families.

Thus, while we agree that addressing these unnecessarily elongated timelines is important, we do not think a state-level guarantee fee premium—an additional fee leveled on Fannie and Freddie-backed mortgages in particular states—is the correct solution for the following reasons.

The proposal targets the wrong problem and penalizes the wrong actors

The justification for a state-level guarantee fee appears to rest on the assumption that state laws are primarily to blame for excessive foreclosure timelines. The proposal suggests, for example, that “if those states were to adjust their laws and requirements to move their foreclosure timelines and costs more in line with the national average, the state-level, risk-based fees … would be lowered or eliminated.”

There are many contributors to delay, however—chief among them servicer-related delays. Some servicer delays are deliberate, some relate to lack of servicer capacity and/or competence, and some relate to servicer inability or unwillingness to follow legal requirements, as demonstrated by the fraudulent papers submitted to courts under the practice now known as “robosigning.” Many long foreclosure timelines are not due to the existence of a particular law—rather, they are due to the failure to comply with laws.

The proposal ventures into dangerous waters by pricing for risk posed by completely exogenous factors

It is well known that Fannie and Freddie make distinctions among products and borrower characteristics for the purposes of pricing. While debate continues about the appropriate extent of such risk-based pricing, at least distinctions related to the individual loan product or borrower are under the control of the borrower or the originator. Pricing for risks unrelated to the individual loan or borrower—depending on exogenous factors not under their control—is a completely different undertaking.

The risk-based pricing proposed here by the Federal Housing Finance Agency is particularly troubling because it relates to a factor entirely out of the control of both borrowers and originators with no limiting principle. How will the agency determine which external risk factors justify a risk premium? High unemployment, for example, is widely considered to drive an increase in foreclosure activity. Will the agency impose additional premiums on loans made in states with high unemployment rates?

The proposal’s methodology for identifying the states to penalize is fundamentally flawed and double-charges for the costs imposed by lengthy timelines

The Federal Housing Finance Agency’s proposal is grounded on the assumption that longer foreclosure timelines cause bigger losses for Fannie Mae and Freddie Mac. But the agency’s methodology fails to account for numerous other variables that influence the ultimate cost to these two enterprises—even while the agency likely has access to more data related to these variables than most other market participants or observers—and therefore does not provide support for this proposition.

The methodology fails to consider, for example, whether certain state laws actually save Fannie and Freddie money by preventing unnecessary foreclosures. What’s more, there is no analysis at all to demonstrate that state laws are causing the foreclosure delays rather than servicer behavior or volume, nor that the costs incurred during a “normal” market would justify the proposed increases.

For these reasons, we oppose the implementation of the proposal and strongly suggest that it be withdrawn. Alternatively, if the Federal Housing Finance Agency does not withdraw the proposal, we suggest that the agency significantly revise the methodology for assessing the cost of delays and for identifying the states impacted.

Download the full comment letter here.

SOURCE: AP/Ben Margot

A home is seen for sale in Alameda, California.

The Federal Housing Administration’s actuarial report for fiscal year 2012 projects that the government-run mortgage insurer could soon require taxpayer support for the first time in its 78-year history. According to the report, the agency’s primary insurance fund has a negative “economic value” of $16.3 billion, meaning it does not have enough money to cover all expected claims over the next 30 years.

Here are seven key points to consider:

• The Federal Housing Administration is not running out of cash anytime soon. The agency still has $30.4 billion in its coffers to settle insurance claims as they come in. But according to federal budget rules, the agency must hold enough capital to cover all expected claims over the next 30 years, which would require about $46.7 billion according to its actuaries. That leaves a long-run shortfall of $16.3 billion.
• This report does not mean the Federal Housing Administration will definitely require taxpayer support. The actuarial report is meant to help the agency with its annual budgeting process. It will be months before we know whether the Federal Housing Administration will require support from taxpayers and how much that support will cost. In the meantime, the agency is expected to generate $11 billion in revenues through the remainder of the fiscal year, which will help shore up the capital reserve.
• If the Federal Housing Administration does require support, taxpayers would be getting a bargain. Without the agency’s help in recent years, it would have been much more difficult for middle-class families to access mortgage credit since the housing crisis began. According to Moody’s Analytics, the agency’s actions prevented home construction from plummeting 60 percent from already depressed levels and home prices from dropping an additional 25 percent. This would have sent our economy into a double-dip recession, costing 3 million jobs and half a trillion dollars in economic output.
• The Federal Housing Administration’s current financial troubles are the result of a prolonged foreclosure crisis and a few poor policy decisions. The bulk of the agency’s losses come from loans originated between 2007 and early 2009. A large percentage of those loans included so-called “seller-financed down payment assistance,” where sellers covered the required down payment at the time of purchase, but often fraudulently inflated the purchase price to make the transaction worthwhile. If the agency had never allowed seller-financed loans in its insurance programs it could have avoided more than $15 billion in losses and would not need taxpayer support today.
• The Federal Housing Administration’s basic business model of sustainable low-down-payment lending is still profitable. The agency’s more recent years of business, roughly 70 percent of which had down payments of less than 5 percent, are likely to be some of its most profitable ever due in part to higher fees and new protections put in place by the Obama administration.
• If the Federal Housing Administration does need to draw money from the U.S. Treasury, it would not be a “bailout.” According to the budget rules governing all federal credit programs, if the agency does not have enough money to cover all expected claims over the next 30 years, the U.S. Treasury automatically fills the gap—there would be no need for Congress to act. The chance of that support has always been part of the agreement taxpayers made with the Federal Housing Administration, dating back to the 1930s.
• It’s actually quite remarkable that the agency made it this far without support. In the wake of the crisis, most private mortgage insurers have either gone out of business or significantly scaled back their insurance activity, while the Federal Housing Administration increased its business. So the agency has actually outperformed its counterparts in the private sector.

John Griffith is a Policy Analyst with the Economic Policy team at the Center for American Progress.

SOURCE: AP/David Zalubowski

In this Saturday, March 17, 2012, photo, a pending sale sign is seen outside a home on the market in south Denver, Colorado.

Some economists and experts are pushing the notion that the key to a strong housing market is a strong economy. They argue that we don’t need specific policies to address the housing crisis, and instead should focus only on policies that grow the broader economy and create jobs.

They’re wrong.

In reality, the housing market is where the Great Recession of 2007­–2009 began and we’re not likely to see a robust economic recovery until the housing market heals. We’re beginning to see the early stages of a housing recovery with the housing sector finally starting to contribute positively to economic growth, but the housing market remains far from healthy.

Below are six reasons why lawmakers need to focus on housing to help spur further growth, rather than ignore this important business sector and hope for the best:

• Housing booms lead the way to broader economic growth, not vice versa. During our three previous recessions—in 1980, 1991, and 2001—residential investment led the way to recovery, growing more than 30 percent on average in the first years of the recovery. Despite recent gains, the housing market has so far lagged behind growth in the broader economy, translating into billions of dollars in lost economic output and millions of missing jobs.
• If home construction were near its historic norm, it would create an additional 3 million jobs. The housing sector traditionally accounts for roughly one-fifth of the U.S. economy, but construction on new homes today is currently about half of the historic norm. Since each home built creates three new full-time jobs and $90,000 in tax revenue, an upturn in home construction would be a significant boost for the economy and alleviate some pressure on state and local budgets.
• Demand for homes is down primarily because of tight lending standards, not the economy. According to a recent survey from Fannie Mae, 72 percent of Americans believe that now is a good time to buy a home, but many are having a hard time getting approved for a home loan, thanks to excessively tight credit standards at banks. In August 2012 a typical rejected applicant for a Fannie- or Freddie-backed loan had a FICO credit score of 734 and a down payment of 19 percent. Data show that more than 50 percent of credit scores are below 734.
• Consumer spending will not come back until housing recovers. High-debt households generally consume 15 percent less than low-debt households. In particular, underwater borrowers—those who owe more on their house than their house is worth—spend less on home maintenance and renovations, chilling demand in home-related industries.
• Lack of home equity constrains small-business formation and investment. Roughly one in four small-business owners uses home equity as a source of capital or collateral.
• Each foreclosure results in enormous spillover costs to investors, borrowers, and local communities. Foreclosures not only harm borrowers and investors but they also devastate communities. One recent study estimates that spillover costs of foreclosures have reached nearly $2 trillion. Plus, each vacant home brings down the value of neighboring homes by more than $20,000, costs state and local governments $34,000 in tax revenues and associated services, and can also become a hotbed for crime and other social problems.

Fixing our housing problems will not be easy but it is crucial to our economic recovery. With that in mind, policymakers should stop waiting for the housing sector to fix itself and should put in place policies to get the market back to full strength.

Sam Hughes is an intern with the Housing team at the Center for American Progress.

SOURCE: AP/J. Scott Applewhite

The Federal Reserve Building sits on Constitution Avenue in Washington.

More than five years into the worst foreclosure crisis since the Great Depression, we’re finally starting to see signs of a housing recovery. Home prices have risen in markets across the country for three consecutive months. Construction on new homes has surged to its highest levels since 2008. Foreclosure filings are at a five-year low, while foreclosed properties now make up the smallest percentage of home sales since the crisis began.

The recent upswing has made the nation’s largest financial institutions optimistic. JPMorgan Chase CEO Jamie Dimon announced earlier this month that “the housing market has turned the corner,” while Wells Fargo’s Tim Sloan similarly said that his company has “seen a turn” in the market.

There’s no shortage of opinions on why the housing market is suddenly on the mend and who’s responsible for turning it all around. But few observers credit the federal government, which has provided extraordinary levels of support to the housing sector since the crisis began. Here are five ways in which the government helped nurse the market back to (relative) health.

1. Fannie Mae and Freddie Mac stayed open for business. In the late summer of 2008, as the entire financial system began to crumble, mortgage financiers Fannie Mae and Freddie Mac were on the brink of failure. The Bush administration placed the companies under government conservatorship in September 2008, and since then they have required more than $140 billion in taxpayer support to stay solvent. In return, Fannie and Freddie have kept mortgage credit available, backing roughly 60 percent of all home loans since the crisis began.
2. The Federal Housing Administration took on a larger market share as private actors retreated. As private investors retreated from the mortgage business in the early days of the crisis, the Federal Housing Administration—a government-run mortgage insurer—increased its insurance activity to keep money flowing into the market. In 2005 the agency only insured about 3 percent of home-purchase loans. By 2010 that number had increased to 40 percent. According to one estimate from Moody’s Analytics,the agency’s actions prevented home prices from dropping an additional 25 percent, which in turn saved 3 million jobs and half a trillion dollars in economic output.
3. The Federal Reserve pushed mortgage rates to record lows. Since the crisis began, the Federal Reserve has taken unprecedented steps to keep interest rates low, hoping to spur investment in housing and other sectors of the economy. In addition to setting bank borrowing rates near zero, the central bank in November 2008 began purchasing large quantities of mortgage-backed securities and other financial assets, a process known as “quantitative easing,” to further lower rates and stimulate the economy. (The Fed expanded the bond-buying program for the second time last month.) In part because of the Fed’s actions, average mortgage rates are below 3.5 percent for the first time ever, which, combined with low housing prices, makes owning a home more affordable than ever—as long as you can get a mortgage.
4. The Obama administration helped millions of homeowners refinance to those low rates. More than 16 million households have refinanced since the spring of 2009, in part because of programs put in place by the Obama administration. In 2009 the Obama administration established the Home Affordable Refinance Program to streamline refinancing of underwater loans owned or guaranteed by Fannie Mae and Freddie Mac. Then, in October 2011 the administration instituted major changes to the program to boost participation. More than 1.6 million families have refinanced through the program so far. Roughly another 1 million homeowners with loans insured by the Federal Housing Administration have refinanced since 2009 through the agency’s Streamlined Refinance program.
5. The administration helped millions more avoid foreclosure by restructuring their mortgage. The Obama administration’s Home Affordable Modification Program has helped more than 1 million struggling families avoid foreclosure by modifying their home loans. The program established an industry standard for mitigating losses and keeping families in their homes, which has led to millions more non-government-supported mortgage modifications since 2009.

To be sure, many government housing programs have fallen well short of their goals, and the crisis has lasted much longer than most analysts expected. It’s fair to say that the housing market and the broader economy would have benefited from a more aggressive response from Congress and the Obama administration.

But it’s also important to give credit where it’s due. Without the federal government’s unprecedented support, it would have been much more difficult for middle-class families to get a home loan since the crisis began. Home prices would have plummeted even further than they did. Fewer families would be able to take advantage of historically low interest rates. More families would have lost their homes to foreclosure. And a further housing downturn would have sent devastating ripples throughout our economy.

Indeed, there are many reasons why housing seems to be a bright spot in our economy today, and the government is certainly one of them.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress.

SOURCE: AP/David Zalubowski

A "for sale" sign stands in front of a single-family home in south-central Denver.

In August 2012 the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued their notice of proposed rulemaking on Regulatory Capital Rules to implement the Basel III global regulatory standard. In response, the CAP Housing team, Mortgage Finance Working Group, and several other leading housing and consumer advocacy organizations submitted comments for the public record. Below is a summary of those comments. The official comment letter can be downloaded here.

Adequate capitalization—ensuring financial institutions have enough capital to absorb potential losses—is a critical component of any sustainable financial system. Strengthening institutional capital in our banking system can provide an important foundation for a stronger, more stable economy.

It is essential, however, that higher capital levels support a housing finance system that distinguishes between the reckless and overleveraged activities of the financial industry that caused the housing crisis and the legitimate pursuit of business that promotes long-term homeownership and affordable rental opportunities. In other words, capital rules should promote safety and soundness by encouraging lenders to provide affordable and sustainable mortgage products to creditworthy borrowers, but not push categories of borrowers out of the market entirely or discourage sustainable loan modifications to keep troubled borrowers in their homes.

We are particularly concerned about discouraging banks from originating mortgages with down payments that are smaller than 20 percent. The size of a down payment can create a significant barrier to obtaining mortgage credit, and there is ample evidence that lenders can extend mortgage credit to low-wealth households in a safe and sound manner. To avoid locking large portions of households out of homeownership, capital rules should consider providing capital relief when mortgage insurance or other credit enhancements are present.

Additionally, because the capital rules should seek to foster the broad availability of safe and sound mortgages for single-family and affordable multifamily properties, regulators should be mindful of the potential to drive mortgage lending out of banks, especially smaller institutions.

With this in mind, we submit the following recommendations for consideration:

• Consider properly funded/capitalized/structured mortgage insurance and other credit enhancements when assigning risk-based weights based on loan-to-value ratios
• Focus risk categories on the sustainability of the loan product
• Ensure that risk-weighting rules do not discourage lenders and investors from modifying troubled mortgages to reduce risk of default or re-default
• Distinguish between different types of second liens when setting risk weights
• Expand the equity rules on multifamily loans to avoid disadvantaging loans for affordable housing
• Exempt small banks, community lenders, and Community Development Financial Institutions from changing their mortgage-related capital standards or at least do not require risk weights to be adjusted for existing mortgages

Download the full comment letter here (pdf)

SOURCE: AP/ Paul Sakuma

Without the Federal Housing Administration’s support, it would have been much more difficult for middle-class families to get a home loan since the housing crisis began.

Endnotes and citations are available in the PDF version of this issue brief.

For close to 80 years the Federal Housing Administration has helped millions of working-class families achieve homeownership and has promoted stability in the U.S. housing market—all at no cost to taxpayers. The government-run mortgage insurer is a critical part of our economy, helping first-time homebuyers and other low-wealth borrowers access the long-term, low down-payment loans they need to afford a home.

More recently, the agency prevented a complete collapse in the housing market, likely saving us from a double-dip recession. As private investors retreated from the mortgage business in the wake of the worst housing crisis since the Great Depression, the Federal Housing Administration increased its insurance activity to keep money flowing into the market. Without the agency’s support, it would have been much more difficult for middle-class families to get a home loan since the crisis began. Home prices would have plummeted even further, households would have lost much more wealth than they already did during the crisis, and even more families would have lost their homes to foreclosure.

A further decline in the housing market would have sent devastating ripples throughout our economy. By one estimate, the agency’s actions prevented home prices from dropping an additional 25 percent, which in turn saved 3 million jobs and half a trillion dollars in economic output.

But the agency was not immune to the housing crisis. Today it faces mounting losses on loans that originated as the market was in a freefall. Housing markets across the United States appear to be on the mend, but if that recovery slows, the agency may soon require support from taxpayers for the first time in its history.

If that were to happen, any financial support would be a good investment for taxpayers. Over the past four years, the Federal Housing Administration’s efforts saved families billions of dollars in home equity (a 25-percent drop in home prices translates to about $3 trillion in lost property values today), kept interest rates from skyrocketing (and with them monthly mortgage payments), and helped millions of workers keep their jobs. Any support would amount to a tiny fraction of the agency’s contribution to our economy in recent years. (We’ll discuss the details of that support later in this brief.)

In addition, any future taxpayer assistance to the agency would almost certainly be temporary. The reason: Mortgages insured by the Federal Housing Administration in more recent years are likely to be some of its most profitable ever, generating surpluses as these loans mature. This is due in part to new protections and tightened underwriting standards put in place by the Obama administration.

The chance of government support has always been part of the deal between taxpayers and the Federal Housing Administration, even though that support has never been needed. Since its creation in the 1930s, the agency has been backed by the full faith and credit of the U.S. government, meaning it has full authority to tap into a standing line of credit with the U.S. Treasury in times of extreme economic duress—and no act of Congress is necessary. Extending that credit isn’t a bailout—it’s fulfilling a legal promise.

Looking back on the past half-decade, it’s actually quite remarkable that the Federal Housing Administration has made it this far without our help. Five years into a crisis that brought the entire mortgage industry to its knees and led to unprecedented bailouts of the country’s largest financial institutions, the agency’s doors are still open for business. This issue brief puts the agency’s current financial troubles in perspective. It explains the role that the Federal Housing Administration has had in our nascent housing recovery, provides a picture of where our economy would be today without it, and lays out the risks in the agency’s $1.1 trillion insurance portfolio.

Without the Federal Housing Administration, the housing downturn would have been much worse

Since Congress created the Federal Housing Administration in the 1930s through the late 1990s, a government guarantee for long-term, low-risk loans—such as the 30-year fixed-rate mortgage—helped ensure that mortgage credit was continuously available for just about any creditworthy borrower. In the decades leading up to the recent crisis, the agency served a small but meaningful segment of the U.S. housing market, focusing mostly on low-wealth households and other borrowers who were not well-served by the private market.

In the late 1990s and early 2000s, the mortgage market changed dramatically. New subprime mortgage products backed by Wall Street capital emerged, many of which competed with the standard mortgages insured by the Federal Housing Administration. These products were often poorly underwritten (if underwritten at all) and were easier to process than FHA-backed loans, often translating into far better compensation for their originators. This gave lenders the motivation to steer borrowers toward higher-risk and higher-cost subprime products, even when they qualified for safer FHA loans.

As private subprime lending took over the market for low down-payment borrowers in the mid-2000s, the agency saw its market share plummet. In 2001 the Federal Housing Administration insured 14 percent of home-purchase loans; by 2005 that number had decreased to less than 3 percent.

The rest of the story is well-known. The influx of new and largely unregulated subprime loans contributed to a massive bubble in the U.S. housing market. In 2008 the bubble burst in a flood of foreclosures, leading to a near collapse of the housing market. Wall Street firms stopped providing capital to risky mortgages, banks and thrifts pulled back, and subprime lending essentially came to a halt. The mortgage giants Fannie Mae and Freddie Mac, facing massive losses on their own risky mortgage investments, were placed under government conservatorship and significantly scaled back lending, especially for home-purchase loans with low down payments.

The Federal Housing Administration’s lending activity then surged to fill the gap left by the faltering private mortgage market. By 2009 the agency had taken on its biggest book of business ever, backing roughly one-third of all home-purchase loans. Since then the agency has insured a historically large percentage of the mortgage market, and in 2011 backed roughly 40 percent of all home-purchase loans in the United States.

By playing this key countercyclical role, the Federal Housing Administration ensured that middle-class families could still buy homes, preventing a more devastating market downturn caused by a halt in home sales. The agency has backed more than 4 million home-purchase loans since 2008 and helped another 2.6 million families lower their monthly payments by refinancing. Without the agency’s insurance, millions of homeowners might not have been able to access mortgage credit since the housing crisis began, which would have sent devastating ripples throughout the economy.

It’s difficult to quantify the agency’s exact contribution to our economy in recent years. But when Moody’s Analytics studied the topic in the fall of 2010, the results were staggering. According to preliminary estimates, if the Federal Housing Administration had simply stopped doing business in October 2010, by the end of 2011 mortgage interest rates would have more than doubled; new housing construction would have plunged by more than 60 percent; new and existing home sales would have dropped by more than a third; and home prices would have fallen another 25 percent below the already-low numbers seen at this point in the crisis.

A second collapse in the housing market would have sent the U.S. economy into a double-dip recession. Had the Federal Housing Administration closed its doors in October 2010, by the end of 2011, gross domestic product would have declined by nearly 2 percent; the economy would have shed another 3 million jobs; and the unemployment rate would have increased to almost 12 percent, according to the Moody’s analysis.

“[The Obama administration] empowered the Federal Housing Administration to ensure that households could find mortgages at low interest rates even during the worst phase of the financial panic,” wrote Mark Zandi, chief economist at Moody’s Analytics, in The Washington Post last month. “Without such credit, the housing market would have completely shut down, taking the economy with it.”

The Federal Housing Administration was available when other insurers were not but became vulnerable to losses in the process

Despite a long history of insuring safe and sustainable mortgage products, the Federal Housing Administration was still hit hard by the foreclosure crisis. The agency never insured subprime loans, but the majority of its loans did have low down payments, leaving borrowers vulnerable to severe drops in home prices.

The agency is currently facing massive losses on loans insured in the later years of the housing bubble and the early years of the financial crisis, when lenders starting turning to the agency to sustain their origination volume and certain homebuyers found few alternatives to FHA-insured loans (mainly those who didn’t have pristine credit and cash for a 20-percent down payment). These losses are the result of a higher-than-expected number of insurance claims, resulting from unprecedented levels of foreclosure during the crisis.

According to recent estimates from the Office of Management and Budget, loans originated between 2005 and 2009 are expected to result in an astounding $27 billion in losses for the Federal Housing Administration. The 2008 book of business alone accounts for about $11 billion of those losses, making it the worst book in the agency’s history by just about any metric (the agency eventually strengthened its business by issuing new underwriting standards and other protections that took effect second fiscal quarter of 2009—which we’ll discuss later in this issue brief.)

These books of business have a high concentration of so-called seller-financed down payment assistance loans, in which sellers covered the required down payment at the time of purchase often in exchange for inflated purchase-prices. Seller-financed loans were often riddled with fraud and tend to default at a much higher rate than traditional FHA-insured loans. They made up about 19 percent of the total origination volume between 2001 and 2008 but account for 41 percent of the agency’s accrued losses on those books of business, according to the agency’s latest actuarial report.

For years the Federal Housing Administration tried to eliminate seller-financed down payment assistance from its programs but met strong opposition in Congress, thanks in part to a “well-coordinated lobbying effort by a coalition of the nonprofit companies, housing and minority groups and home builders,” according to The Wall Street Journal. Congress finally banned seller-financed loans from the agency’s insurance programs in the Housing and Economic Recovery Act of 2008 (which didn’t actually take effect until the second fiscal quarter of 2009). If such a ban had been in place from the start, the agency could have avoided more than $14 billion in losses, which would have put it in a much better capital position going into the crisis, according to the latest actuarial report.

While millions of FHA-backed loans have already ended in an insurance claim that had to be paid by the agency, millions more are still in the foreclosure pipeline. For instance, roughly one in four outstanding FHA-backed loans made in 2007 or 2008 is “seriously delinquent,” meaning the borrower has missed at least three payments or is in bankruptcy or foreclosure proceedings.

A disproportionate percentage of the agency’s serious delinquencies are seller-financed loans that originated before January 2009 (when such loans got banned from the agency’s insurance programs). According to agency estimates, roughly 725,000 FHA-backed loans are seriously delinquent today, and about 14 percent of those loans had seller-financed down-payment assistance. By comparison, seller-financed loans make up just 5 percent of the agency’s total insurance in force today.

As riskier loans pass through the system, the agency’s more recent books of business are very strong

While the losses from loans originated between 2005 and early 2009 will likely continue to appear on the agency’s books for several years, the Federal Housing Administration’s more recent books of business are expected to be very profitable, due in part to new risk protections put in place by the Obama administration. Beginning in 2009 the agency increased insurance premiums four times—to the highest levels in its history. It also enforced new rules that require borrowers with low credit scores to put down higher down payments, took steps to control the source of down payments, overhauled the process through which it reviews loan applications, and ramped up efforts to minimize losses on delinquent loans.

As a result of these and other changes enacted since 2009, the 2010 and 2011 books of business are together expected to bolster the agency’s reserves by nearly $14 billion, according to recent estimates from the Office of Management and Budget. The new 2012 book of business is projected to add another $3.7 billion to their reserves, further balancing out losses on previous books of business.

These are, of course, just projections, but the tightened underwriting standards and increased oversight procedures are already showing signs of improvement. At the end of 2007 about 1 in 40 FHA-insured loans experienced an “early period delinquency,” meaning the borrower missed three consecutive payments within the first six months of origination—usually an indication that lenders had made a bad loan. That number is closer to 1 in 250 today.

The agency’s capital reserves are still uncomfortably low today

Despite these improvements, the capital reserves in the Mutual Mortgage Insurance Fund—the fund that covers just about all the agency’s single-family insurance business—are uncomfortably low. Each year independent actuaries estimate the fund’s economic value: If the Federal Housing Administration simply stopped insuring loans and paid off all its expected insurance claims over the next 30 years, how much cash would it have left in its coffers? Those excess funds, divided by the total amount of outstanding insurance, is known as the “capital ratio.”

The Federal Housing Administration is required by law to maintain a capital ratio of 2 percent, meaning it has to keep an extra $2 on reserve for every $100 of insurance liability, in addition to whatever funds are necessary to cover expected claims. As of the end of 2011, the fund’s capital ratio was just 0.24 percent, about one-eighth of the target level.

The agency has since recovered more than $900 million as part of a settlement with the nation’s biggest mortgage servicers over fraudulent foreclosure activities that cost the agency money. While that has helped to improve the fund’s financial position, many observers speculate that the capital ratio will fall even further below the legal requirement when the agency reports its finances in November.

This is a legitimate concern but not one that should be overstated. As required by law, the Mutual Mortgage Insurance Fund still holds $21.9 billion in its so-called financing account to cover all of its expected insurance claims over the next 30 years using the most recent projections of losses. The fund’s capital account has an additional $9.8 billion to cover any unexpected losses.

That’s not enough to meet the 2 percent capital ratio target, but the agency still has plenty of cash on hand to cover its insurance liabilities based on reasonable expectations in the housing market—and even has some extra money set aside for a rainy day.

That said, the agency’s current capital reserves do not leave much room for uncertainty, especially given the difficulty of predicting the near-term outlook for housing and the economy. In recent months, housing markets across the United States have shown early signs of a recovery. If that trend continues—and we hope it does—there’s a good chance the agency’s financial troubles will take care of themselves in the long run.

But if the recovery stalls and home prices begin to dip lower—which likely would cause another wave of foreclosures—the Federal Housing Administration’s capital cushion may not be sufficient. In that unfortunate event, the agency may need some temporary support from the U.S. Treasury as it works through the remaining bad debt in its portfolio. This support would kick in automatically—it’s always been part of Congress’ agreement with the agency, dating back to the 1930s—and would amount to a tiny fraction of the agency’s portfolio. It would also be a bargain, considering how taxpayers have benefitted from the agency over the past eight decades—and especially the past four years.

The Federal Housing Administration’s current financial troubles must be kept in perspective

It’s rather astonishing that the Federal Housing Administration made it this far without requiring taxpayer support, especially in light of the financial troubles the agency’s counterparts in the private sector experienced. In the wake of the crisis, most private mortgage insurers have either gone out of business or significantly scaled back their insurance activity, while the agency meaningfully increased its insurance activity to help keep the market afloat and prevent another crisis.

If the agency does require support from the U.S. Treasury in the coming months, taxpayers will still walk away on top. The Federal Housing Administration’s actions over the past few years have saved taxpayers billions of dollars by preventing massive home-price declines, another wave of foreclosures, and millions of terminated jobs. Considering the strength of the agency’s recent books of business, any temporary assistance would almost certainly be paid back over a reasonable time frame.

To be sure, there are still significant risks at play. There’s always a chance that our nascent housing recovery could change course, leaving the agency exposed to even bigger losses down the road. That’s one reason why policymakers must do all they can today to promote a broad housing recovery, including supporting the Federal Housing Administration’s ongoing efforts to keep the market afloat.

Regardless of how the mortgage market changes in the coming years, the agency continues to serve a vital purpose, both by expanding homeownership to underserved segments of the market and by providing liquidity in times of economic duress. The agency has filled both roles dutifully in recent years, helping us avoid a much deeper economic downturn. For that, we all owe the Federal Housing Administration a debt of gratitude and our full financial support.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress.

SOURCE: AP/Don Ryan

A "sale pending" sign is shown in front of a foreclosed house in Tigard, Oregon.

In September 2012 the Consumer Financial Protection Bureau, or CFPB, issued their notice of proposed rulemaking on mortgage servicing standards under the Real Estate Settlement Procedures Act, or RESPA. In response, the Center for American Progress submitted comments for the public record. (The Center for American Progress also signed onto a complementary comment with other groups, which can be found here). Below is a summary of those comments. The official comment letter can be downloaded here.

Providing comprehensive servicing standards for all mortgage servicers is one of the Consumer Financial Protection Bureau’s most important functions. While bad lending practices and risky products triggered the housing crisis, the abject failure of the mortgage-servicing industry to mitigate losses or to follow the law when pursuing foreclosures greatly exacerbated the damage done to homeowners, communities, the housing market, and the larger economy.

This comment letter focuses on the three overarching points that could strengthen the bureau’s proposed mortgage-servicing standards:

• The key to successful loss mitigation is helping the consumer before the foreclosure starts and before any “dual track” begins. (Dual tracking, which refers to a servicer’s attempt to conduct loss mitigation while at the same time taking steps toward foreclosure, is a widely criticized practice that confuses homeowners and reduces the likelihood of successfully avoiding foreclosure). For this reason, the Consumer Financial Protection Bureau should make sure there is a sufficient period of time for homeowners to seek help before the foreclosure process begins and that servicers review files before initiating the foreclosure to ensure the homeowner had a fair opportunity to obtain a foreclosure alternative.
• The best way to improve servicing standards is to make the process as similar as possible across all servicers and books of business.
• When a servicer fails to review a loan for foreclosure alternatives, the homeowner should have the ability to hold the servicer accountable.

Require loss mitigation before the foreclosure process begins

Helping consumers prior to the start of the foreclosure process—and even prior to default, when default is reasonably foreseeable—saves money for investors and homeowners alike and is far more likely to result in an affordable, sustainable modification or other alternative to foreclosure. For early intervention to work, however, homeowners must have an opportunity to be reviewed for loss mitigation before the servicer initiates foreclosure proceedings.

A useful model is provided by the Servicing Alignment Initiative, or SAI—an effort by the Federal Housing Finance Agency that aligned and improved the servicing practices of Fannie Mae and Freddie Mac. The initiative provides a standard 120-day “pre-foreclosure” period after delinquency, before the servicer initiates a foreclosure. During this “pre-foreclosure” period, servicers reach out to delinquent homeowners to provide every opportunity to obtain assistance. The initiative also requires a mandatory review of each file before initiating foreclosure to ensure the servicer adequately reached out to the borrower and appropriately reviewed any application for assistance. This review helps to avoid unnecessary foreclosures, an extremely important goal for this Consumer Financial Protection Bureau rulemaking.

Align the servicing process across all servicers and all books of business

No matter how good any servicing standards look on paper, they will only work if mortgage servicers and the general public understand what the standards are, how they work, and in what situations they apply. After the housing bubble burst, many homeowners lost their homes unnecessarily because they did not understand what rules governed the servicing of their mortgage and because their servicers provided them with incorrect information—in many cases, through ignorance or confusion rather than malfeasance. The best way to ensure broad understanding of the rules is to try to have as much uniformity as possible across the industry.

We acknowledge that the Consumer Financial Protection Bureau is not likely to impose extremely detailed standards across the board for all servicers and investors, and such detailed standards would not necessarily be workable. But the bureau can certainly adopt the same basic structure that already applies to the government-sponsored enterprises and the parties to the National Mortgage Settlement. (The National Mortgage Settlement is a legal settlement between 49 states, the federal government, and the country’s five largest mortgage servicers. In the settlement, these servicers agreed to strong, uniform servicing standards.)

Enable homeowners to hold servicers accountable for their failure to review a loan for foreclosure alternatives

Given the importance of loss mitigation and uniform processes surrounding foreclosure, it is of the utmost importance that homeowners have the ability to hold servicers accountable if servicers do not follow loss-mitigation requirements. To provide this accountability, a failure to review the loan for foreclosure alternatives needs to be defined as an “error” under the Real Estate Settlement Procedures Act, which would trigger error-resolution requirements that require servicers to correct their mistake or justify their action. It is also important to not define error resolution too narrowly—even if the current rule solves today’s problems, flexibility is required to prevent tomorrow’s problems.

Download the full comment letter here (pdf)

SOURCE: AP/Steven Senne

A home for sale is seen in Newton, Massachusetts.

The Federal Reserve last week announced plans to expand its monthly purchases of mortgage-backed securities—a process known as “quantitative easing”—until the unemployment situation “improve(s) substantially.” These purchases are expected to push mortgage rates below today’s already-record-low of around 3.6 percent, which in turn should spur families to lower their monthly mortgage payments, boost their disposable income, and pump more money into the economy.

But in order for the Fed’s actions to have a meaningful effect on our economic recovery, families need to actually take advantage of those low rates. Most U.S. households are not in the market for a new home, so the hope is they will access low interest rates by refinancing their mortgages. Yet mortgage rates have been well below historic norms for more than a year, and most eligible homeowners who want to refinance have already done so—more than 16 million households have refinanced since the spring of 2009, according to new data from the Obama administration.

Still, millions of other creditworthy homeowners are unable to refinance today, many due to insufficient equity in their homes. Lenders and mortgage investors are often reluctant to refinance borrowers who are “underwater”—owing more on their mortgage than their home is worth—because borrowers without equity have a higher risk of default. As a result, homeowners who have continued making payments despite plummeting home prices, waves of foreclosures, and a persistently weak economy are stuck in unnecessarily expensive mortgages, blunting the macroeconomic impact of the Fed’s recent policies.

While the Federal Reserve takes unprecedented steps to keep interest rates low, some Republicans in Congress are threatening to block legislation that would help millions of families take advantage of those rates through refinancing. Democrats have similarly been slow to support the legislation. With a little help from Congress, these families could instantly lower their mortgage payments by an average of almost $3,000 a year, decrease their chance of foreclosure, improve their spending power, and give a boost to our economic recovery.

Here are three options on the table in Congress, which if embraced as a bipartisan solution to the lingering housing crisis and tepid economic recovery would go a long way to making the Fed’s quantitative easing more effective:

• Expand a government refinancing program for mortgages backed by the two government-controlled mortgage finance giants Fannie Mae and Freddie Mac.
• Establish a new government program to refinance underwater mortgages not backed by the federal government.
• Consolidate and improve existing refinancing and foreclosure mitigation programs to establish a large-scale refinancing initiative.

Let’s look at each of these options in turn. Then ask yourself why Congress is yet to act.

Expand a government refinancing program for mortgages backed by Fannie Mae and Freddie Mac

In 2009 the Obama administration established the Home Affordable Refinance Program to streamline refinancing of underwater loans owned or guaranteed by the government-controlled mortgage financiers Fannie Mae and Freddie Mac. Then, in October 2011, the administration instituted major changes to the program to boost participation. More than 1.5 million families have refinanced through the program so far.

But more can be done to expand the program and reach more of the 13 million Fannie- or Freddie-backed borrowers who are current on their monthly payments and pay unnecessarily high interest rates. Sens. Robert Menendez (D-NJ) and Barbara Boxer (D-CA) introduced a bill in May that would mandate key changes to the Home Affordable Refinance Program, including installing new incentives that increase competition among lenders and eliminating unnecessary fees. According to estimates from Mark Zandi, chief economist at Moody’s Analytics, the proposed legislation would result in nearly 3 million more refinancings, helping borrowers save a combined $7 billion annually in mortgage payments.

The Menendez-Boxer bill is expected to come to a vote in the Senate soon, perhaps during the lame duck session following the 2012 election. But even if it passes, few expect it to go far in the Republican-controlled House of Representatives.

Establish a new government program to refinance underwater mortgages not backed by the federal government

Since taking office the Obama administration has helped millions of underwater and nearly underwater borrowers with government-backed mortgages refinance through a series of new or recently expanded government programs. Still, most borrowers with purely private loans (those not backed by the federal government) are left without options for refinancing, locking an estimated 3 million families in above-market rates.

President Obama has offered one possible solution: a new program within the Federal Housing Administration to help certain underwater borrowers with private mortgages refinance into new government-insured loans. Sen. Diane Feinstein (D-CA) has since proposed legislation as a helpful jumping-off point for debate, but both Republicans and Democrats have shown little interest in the bill.

Consolidate and improve existing refinancing and foreclosure mitigation programs to establish a large-scale refinancing initiative

Call it the “going big” approach. In July Sen. Jeff Merkley (D-OR) released an ambitious plan to help up to 8 million underwater borrowers refinance their homes into government-backed loans. The plan would leverage unspent money from existing foreclosure prevention programs—namely the Home Affordable Modification Program, the Treasury Department’s Hardest Hit Fund, and the Federal Housing Administration’s Short Refinance Program—to establish a temporary trust to purchase mortgages from private lenders and investors. Homeowners would then have the opportunity to refinance into new low-cost, long-term, and sustainable loans.

According to Sen. Merkley’s analysis, the trust would pay for itself and likely generate a profit for taxpayers over time. Since it uses funds already allocated to existing housing programs, it’s unclear whether the Merkley plan would require legislation. But such a large-scale undertaking would surely benefit from bipartisan support in Congress—unfortunately, the chances of that are slim.

Doing nothing is not an option

During a February speech in Orlando, Florida, Federal Reserve Chairman Ben Bernanke said that “because some creditworthy households are finding it difficult to obtain mortgage credit or to refinance, the strong actions taken by the Federal Reserve … have had less effect on the housing sector and overall economic activity than they otherwise would have had.”

This is not the result of unfortunate circumstance but of deliberate obstructionism by certain congressional Republicans and congressional Democrats dragging their feet. Even with growing consensus that the weakness of the housing market is holding back larger economic growth and job creation, meaningful refinancing housing reforms sit in legislative limbo, leaving millions of families in unnecessarily expensive mortgages, dulling the impact of the Fed’s unprecedented actions, and weakening our economic recovery.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress.

SOURCE: AP/Manuel Balce Ceneta

In this July 11, 2008 file photo, a sign in front of the Fannie Mae headquarters in Washington is seen.

Exactly four years ago, during the early days of the financial crisis, the federal government took control of mortgage financiers Fannie Mae and Freddie Mac through a legal process called conservatorship. Since then, the two companies have required roughly $150 billion in taxpayer support to stay solvent, while the government has kept the housing market afloat by backing more than 95 percent of all home loans made in the United States.

Fannie and Freddie remain two of the largest financial institutions in the world, responsible for a combined $5 trillion in mortgage assets. Still, few Americans understand what Fannie and Freddie actually do for homeowners, what part they played in the recent housing crisis, or what role they’ll have in the mortgage market of the future. On the fourth anniversary of their conservatorship, here are seven things you need to know about the two mortgage giants.

1. What do Fannie Mae and Freddie Mac do?

The primary function of Fannie Mae and Freddie Mac is to provide liquidity to the nation’s mortgage finance system. Fannie and Freddie purchase home loans made by private firms (provided the loans meet strict size, credit, and underwriting standards), package those loans into mortgage-backed securities, and guarantee the timely payment of principal and interest on those securities to outside investors. Fannie and Freddie also hold some home loans and mortgage securities in their own investment portfolios.

Since mortgage lenders don’t have to hold these loans on their balance sheets, they have more capital available to make loans to other creditworthy borrowers. Lenders also have an added incentive to offer safe and sustainable products—namely long-term, fixed-rate mortgages—because they know Fannie and Freddie will likely purchase them. Since Fannie and Freddie guarantee payments in the event of a default—for a fee, of course—investors don’t have to worry about credit risk, which makes mortgages a particularly attractive investment.

Under this system, mortgage credit was continuously available well into the late-1990s under terms and at prices that put sustainable homeownership within reach for most American families. By the end of that decade, however, Wall Street had figured out how to purchase and securitize mortgages without needing Fannie and Freddie as intermediaries, leading to a fundamental shift in the U.S. mortgage market.

2. What role did Fannie and Freddie play in inflating the housing bubble of the mid- to late-2000s?

Contrary to conservative talking points, the answer is very little. During the bubble, loan originators backed by Wall Street capital began operating beyond the Fannie and Freddie system that had been working for decades by peddling large quantities of high-risk subprime mortgages with terms and features that drastically increased the chance of default. Many of those loans were predatory products such as hybrid adjustable-rate mortgages with balloon payments that required serial refinancing, or negative amortization, mortgages that increased the unpaid balance over time.

Wall Street firms such as Lehman Brothers and Bear Stearns packaged these high-risk loans into securities, got the credit-rating agencies to bless them, and then passed them along to investors, who were often unaware or misinformed of the underlying risks. It was the poor performance of the loans in these “private-label” securities—those not owned or guaranteed by Fannie and Freddie—that led to the financial meltdown, according to the bipartisan Financial Crisis Inquiry Commission, among other independent researchers.

In fact, Fannie and Freddie lost market share as the bubble grew: The companies backed roughly half of all home-loan originations in 2002 but just 30 percent in 2005 and 2006. In an ill-fated effort to win back market share, Fannie and Freddie made a few tragic mistakes. Starting in 2006 and 2007—just as the housing bubble was reaching its peak—Fannie and Freddie increased their leverage and began investing in certain subprime securities that credit agencies incorrectly deemed low-risk. Fannie and Freddie also lowered the underwriting standards in their securitization business, purchasing and securitizing so-called Alt-A loans. While Alt-A loans typically went to borrowers with good credit and relatively high income, they required little or no income documentation, opening the door to fraud (which was often perpetrated by the mortgage broker rather than the homebuyer).

These decisions eventually contributed to the companies’ massive losses, but all this happened far too late to be a primary cause of the housing crisis.

3. Why did Fannie and Freddie require a taxpayer bailout?

Fannie and Freddie failed in large part because they made bad business decisions and held insufficient capital. Also, unlike most private investment firms, Fannie and Freddie had only one line of business—residential mortgage finance—and thus did not have other sources of income to compensate when home prices began to fall.

In 2008 Fannie and Freddie lost a combined $47 billion in their single-family mortgage businesses, forcing the companies to dig deep into their capital reserves. Nearly half of those losses came from Alt-A loans, despite those loans accounting for just 11 percent of the companies’ total business. But those losses were only the beginning: Between January 2008 and March 2012, Fannie and Freddie would lose a combined $265 billion, more than 60 percent of which was attributable to risky products purchased in 2006 and 2007.

By late summer in 2008—about a year after the start of the housing crisis—Wall Street firms had all but abandoned the U.S. mortgage market, while pension funds and other major investors throughout the world continued to hold large amounts of Fannie and Freddie securities. If Fannie and Freddie were allowed to fail, experts agreed that the housing market would collapse even further, paralyzing the entire financial system. The Bush administration in September 2008 responded by placing Fannie Mae and Freddie Mac into government conservatorship, where they remain today.

4. Did affordable housing goals for Fannie and Freddie play any role in the subprime crisis?

No.

In 1992 Congress established the “affordable housing goals,” which were numerical targets for the share of Fannie- and Freddie-backed lending that went to low-income and minority borrowers. For years conservative analysts have falsely pointed to these goals as a catalyst for the housing crisis, claiming they pushed Fannie and Freddie to take on unprecedented levels of risk, creating a bubble and a bust in the subprime housing market that sparked the financial catastrophe.

That’s simply not true. A recent study from the Federal Reserve Bank of St. Louis found that the affordable housing goals had no observable impact on the volume, price, or default rates of subprime loans during the crisis, even after controlling for the loan size, loan type, borrower characteristics, and other factors. Federal Reserve Economist Neil Bhutta reached a similar conclusion in 2009, finding that the affordable housing goals had a negligible effect on Fannie and Freddie lending during the housing bubble.

That shouldn’t come as a surprise. Fannie and Freddie did not securitize any loans that met the industry definition of “subprime,” and the loans in their riskier securities—commonly identified as “subprime-like” or “subprime equivalent”—experienced delinquency rates that mirrored the prime market. The Alt-A loans that drove their losses were typically made to higher-income households and thus did not qualify for the affordable housing goals. While Fannie and Freddie did hold some subprime mortgage-backed securities in their investment portfolios—many of which qualified for the affordable housing goals—these investments lagged behind the rest of the market and made up only a tiny fraction of total subprime lending during the housing bubble.

5. How are Fannie and Freddie doing today?

Much better, but both companies still have a very long way to go. Thanks in part to rising home prices, Fannie Mae in August posted its largest quarterly profit since the crisis began, marking its second consecutive profitable quarter. Meanwhile, Freddie Mac reported a quarterly profit for the fifth time since the crisis began.

The improved finances at both companies led the U.S. Treasury Department in August to rework the terms of the government bailout. Under the previous agreement, Fannie and Freddie drew money from the Treasury Department as needed to bolster its capital reserves. In exchange, the companies issued preferred stock to the government on which they paid a mandatory 10 percent dividend. Under the new rules, Treasury will simply claim all of Fannie and Freddie’s profits at the end of each quarter and provide capital when necessary in the event of a quarterly loss.

While the worst of the crisis appears to be over, Fannie and Freddie are a long way from repaying their debt. According to Moody’s Analytics, it could take the companies 15 years to pay back taxpayers in full. Meanwhile, as the government continues to play a central role in the day-to-day operations of Fannie and Freddie, the continued uncertainty has led many key staff to leave and has caused an underinvestment in necessary infrastructure and systems.

6. What should we do with Fannie and Freddie?

With the federal government backing nearly every home loan made in the country today, almost everyone agrees that the current level of support is unsustainable in the long run, and private capital will eventually have to assume more risk in the mortgage market. That leaves two critical questions before policymakers today: What sort of presence should the federal government have in the future housing market, and how do we transition responsibly to this new system of housing finance?

Since the conservatorship of Fannie and Freddie began, dozens of advocacy groups, academics, and industry stakeholders have offered possible answers to these questions. The overwhelming majority of these suggested plans agree that some form of government support is necessary to ensure a stable housing market and to maintain the 30-year fixed-rate mortgage.

In January 2011 the Mortgage Finance Working Group—a progressive group of housing finance experts, affordable housing advocates, and leading academics sponsored by the Center for American Progress—released its plan for responsibly winding down Fannie Mae and Freddie Mac and bringing private capital back into the U.S. mortgage market. Our proposal includes an explicit government backstop on certain mortgage products, requirements that private firms serve the whole market, and an empowered regulator to ensure the sustainability and affordability of mortgage products. The plan also lays out five guiding principles for any reform effort:

• Broad and consistent access to mortgage credit across all communities
• Stability in mortgage finance during all kinds of economic conditions
• Transparency and standardization of products that can be understood
• Access to affordable mortgage finance for both homeownership and rental housing
• Consumer protections to ensure that mortgage products and practices operate in the long-term best interests of borrowers

7. What would happen if we fully privatized the U.S. mortgage market?

Many conservative analysts and politicians—resorting to heated rhetoric and mistruths about the origins of the crisis—argue that we need a fully private mortgage market run by Wall Street. It was the fully private segment of the market, however, that caused millions of foreclosures and brought down the entire financial system. If we draw the wrong lesson from the financial crisis and abruptly withdraw the government from mortgage finance, it will lead to a sharp reduction in the availability of home loans, cutting off access to mortgage finance for the middle class.

History is a helpful guide here. Prior to the introduction of the government guarantee on residential mortgages in the 1930s, mortgages typically had 50 percent down-payment requirements, short durations, and high interest rates—putting homeownership out of reach for many middle-class families. The housing finance system was subject to frequent panics during which depositors demanded cash from their banks, leaving lenders insolvent. That volatility is one reason why every other developed economy in the world has deep levels of government support for residential mortgage finance.

In addition, abruptly removing government support would almost certainly mean the end of the 30-year fixed-rate mortgage, now a pillar of the U.S. housing market. Middle-class families for decades have depended on the security and affordability of this product, which allows borrowers to fix their housing costs and better plan for their futures in an ever more volatile economy. Most experts agree that this highly beneficial product would largely disappear without a government guarantee.

Conclusion

To be sure, Fannie Mae and Freddie Mac were flawed companies that made several bad business decisions, and taxpayers should never again have to foot the bill for any financial institution’s greed. But as policymakers look to the future of U.S. housing finance, they must seek smart reforms that focus on what was broken in the previous system, while maintaining what worked for decades. The federal government must continue to play a key role in the housing market, regardless of whether it works through Fannie and Freddie, a new agency, or purely private firms.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress.

SOURCE: AP/ Chris O'Meara

A foreclosed home is shown on Pine Island in Lee County, Florida. The U.S. housing market is where the Great Recession began and we’re unlikely to see a full recovery until the market heals.

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The ongoing housing crisis remains one of the biggest drags on our economic recovery. But less than three months before a presidential election viewed by many as a referendum on the economy, housing is little more than a side conversation on the campaign trail.

President Barack Obama has barely mentioned housing in recent months, aside from occasional pitches for reforms to help more homeowners refinance. Presumptive Republican nominee Mitt Romney’s 59-point economic plan unveiled last year makes only a couple of passing references to housing, and Gov. Romney is yet to release any substantive housing proposals since.

As our presidential hopefuls stay silent, the sluggish housing market continues to plague our economy. The historic decline in home prices since 2006 has cost Americans more than $7 trillion in household wealth, forced millions of families out of their homes, and left nearly one in four homeowners owing more on their mortgages than their homes are worth. Private investment in housing is a fraction of its historic norm, translating to billions in lost economic output and millions of missing jobs. And more than five years into the crisis, the U.S. mortgage market remains on life support as the federal government guaranteed more than 95 percent of home loans made last year.

The U.S. housing market is where the Great Recession began and we’re unlikely to see a full recovery until the market heals. The housing sector historically accounts for about one-fifth of our economy and housing booms paved the path to our last three economic recoveries. But few analysts expect such a boom anytime soon.

We can no longer afford to ignore these problems. As the presidential campaign shifts into high gear in the coming weeks, President Obama and Gov. Romney must lay out their respective visions for housing in the United States. This brief lays out seven essential questions the presidential candidates need to answer on housing, including:

1. What will you do to prevent more unnecessary foreclosures and keep more families from losing their homes?

2. How will you address the problem of “underwater” mortgages?

3. How will you revitalize communities already hit hard by the foreclosure crisis?

4. How will you meet the pressing need for affordable rental housing?

5. What will you do to assure that working and middle-class families can achieve homeownership in the future?

6. What do you plan to do with the government-backed mortgage giants Fannie Mae and Freddie Mac, and what will take their place in the mortgage market of the future?

7. How do you plan to protect households from predatory lending and discrimination in the U.S. mortgage market?

Each question includes key facts for voters, reporters, and other key stakeholders, as well as a brief discussion of why the issue matters and CAP’s recommendation for fixing the problem.

1.Five years after the housing bubble burst, experts suggest we may be only halfway through the resulting foreclosures, with millions still to come.  Do you think the federal government should do more to help prevent unnecessary foreclosures? If so, how?

Foreclosure is often the worst-case scenario for every party involved, since it results in extraordinarily high costs to borrowers, lenders, and investors—not to mention the spillover effects on the surrounding community and the broader economy. And since millions of at-risk mortgages are owned or guaranteed by the federal government, taxpayers are on the hook for billions in foreclosure-related losses.

There are several ways to lower an at-risk borrower’s monthly payments and increase the chance of repayment. If the borrower is current on their payments, they often have the choice to refinance to today’s historically low interest rates, saving an average of $2,600 a year in interest payments.18 If the borrower has fallen behind, the investor can often save money by working out a new deal, usually by extending the loan’s terms, modifying the interest rate, deferring payments, or lowering the amount the borrower actually owes on the loan—so-called principal reduction. Or, if the borrower either can no longer afford the house or does not wish to stay, they can still leave gracefully without going through a foreclosure, either by handing the home back to the lender (known as a deed-in-lieu-of-foreclosure) or negotiating a short sale with the mortgage investor.

In a well-functioning market, the lender or mortgage investor responsible for the loan considers a range of options when deciding which intervention is best for the specific borrower, and negotiates a deal that minimizes losses and keeps families in their homes when possible. But we’re not in a well-functioning market. Recent experience has shown that mortgage servicers—the companies in charge of collecting timely mortgage payments on behalf of the investor—are often unwilling or unable to work with struggling homeowners, even when those homeowners want to work with them. The result is unnecessary foreclosures which harm the borrower, the investor, surrounding homeowners, and the larger economy.

CAP Policy Recommendation

Streamline refinancing for all borrowers current on their monthly payments and meet minimum underwriting standards (See: John Griffith, “Tossing a Lifeline to Underwater Homeowners” (Washington: Center for American Progress, 2012)) and establish clear and fair standards for mortgage servicers dealing with struggling borrowers. (See: Peter Swire and Jordan Eizenga, “The Importance of a Homeowner Bill of Rights” (Washington: Center for American Progress, 2012)

2.From the peak of the market in 2006, the total amount of home equity in the United States declined by more than $7 trillion, leaving all homeowners with less wealth and more than 11 million families owing more than their homes are worth. How do you plan to address this pressing problem of “underwater” mortgages?

If the housing market is weighing down our economic recovery, negative equity is the anchor at the end of the chain. Underwater borrowers are at significantly higher risk of foreclosure than borrowers with equity in their homes, in part because if something unexpected happens—such as a death in the family, divorce, disability, or temporary bout of unemployment—the borrower has no cushion to fall back on.24 These borrowers typically have trouble refinancing to today’s historically low rates simply because they don’t have equity and they often have trouble selling their homes—say, to move for a new job opportunity—because the bank has to agree to take a loss through a short sale.

Then there are the broader economic impacts of negative equity. Underwater mortgages constrain lending beyond the housing market, as home equity is a critical source of capital or collateral for small businesses,25 college students,26 and elderly adults. Homeowners with little or no equity are often reluctant to invest in renovations and home improvements, stifling demand for home-related products from window curtains to washing machines. Borrowers digging their way out of mortgage debt spend less in stores, making businesses leery of investment. For these and other reasons, analysts have observed that the recovery is weakest in places where mortgage debt is the highest.

CAP Policy Recommendation

Encourage targeted principal reductions at Fannie Mae and Freddie Mac using “shared appreciation,” where the entities agree to write off some of the outstanding balance in exchange for a portion of any future price appreciation on the home. (See: John Griffith and Jordan Eizenga, “Sharing the Pain and Gain in the Mortgage Market” (Washington: Center for American Progress, 2012)

3.For the communities already hit hard by the foreclosure crisis, how do you plan to revitalize neighborhoods and stabilize local housing markets?

While foreclosures have skyrocketed nationwide, some areas are particularly hard hit, from impoverished urban neighborhoods to ghosttown exurbs. Each foreclosure drives the surrounding property values down further, leading to a downward spiral of more foreclosures and additional value decline. Multiple foreclosures cost states and localities enormous sums of money in lost tax revenue, prompting deep cuts to critical public services.

At the same time, vacant or inadequately maintained homes attract crime, arson, and squatters, which increases costs for fire, police, and other services. As people leave the neighborhoods, local businesses are forced to shutter their doors, leading to yet another spiral of departure, foreclosures, and business failures. Health and safety can be impacted by uncollected garbage, dilapidated homes, and abandoned pets; for example, in states such as California and Florida, untended swimming pools have become a breeding ground for disease-carrying mosquitos.

In some blighted neighborhoods the overhang of foreclosed homes—many of which are owned by the government through Fannie Mae, Freddie Mac, and the Federal Housing Administration35—gluts the for-sale market, keeping home prices low. In others, foreclosed homes are largely being purchased by investors and rented out, which can provide a useful source of affordable housing but may also significantly change the nature of the neighborhood without additional investment and attention.

CAP Policy Recommendation

Rehabilitate certain government-owned foreclosed properties and convert them to affordable, energy-efficient rentals through “Rehab-to-Rent.” (See: Alon Cohen, Jordan Eizenga, John Griffith, Bracken Hendricks, and Adam James, “Rehab-to-Rent Can Help Hard-Hit Communities and Our Economy” (Washington: Center for American Progress, 2012))

4.The need for affordable rental housing continues to rise, with 5 million more low-income renters than there are affordable rental units. At a time of fiscal austerity, how do you plan to meet this unmet need?

Nearly 100 million Americans—roughly one-third of the U.S. population—live in rental housing. Renters on average earn less than homeowners yet spend more on housing each month as a percentage of income45 and they face an even more expensive future. Rental vacancies hit a 10-year low in 2011 and rents increased last year in 24 of the 25 markets tracked by realty firm Trulia. The foreclosure crisis is partly to blame for these increases: Families often have to wait up to seven years following a foreclosure to obtain financing to purchase another home, during which they have no choice but to rent.

Wages have not kept up with this increase in rents, leaving one in four renters today paying more than half of their monthly income on rent.48 Meanwhile, as the number of low-income renters grew by 2.2 million over the last decade, the number of adequate and affordable rental units actually decreased. As needs skyrocketed, lawmakers actually cut federal support to key affordable housing programs such as public housing, the HOME Investment Partnerships program, and the Community Development Block Grant program.

Unaffordable rents are depressing demand for goods and services. Lower-income families in unaffordable housing units spend 50 percent less on clothes and health care, 40 percent less on food, and 30 percent less on insurance and pensions compared to families in affordable units, according to Harvard’s Joint Center on Housing Studies.

CAP Policy Recommendation

Capitalize the Housing Trust Fund, ramp up funding for Low Income Housing Tax Credits, guarantee certain debt issued by Community Development Financial Institutions, and establish a stable, liquid, and responsible market for multifamily housing finance. (See: Mortgage Finance Working Group’s Multifamily Subcommittee, “A Responsible Market for Rental Housing Finance” (Sponsored by the Center for American Progress, 2010)

5.The U.S. homeownership rate has dropped significantly in recent years as a result of foreclosures and tightened credit standards. Do you think it is important for more Americans to be able to buy homes? If so, what role do you think the federal government should play in achieving that goal?

Homeownership remains a key part of the American Dream. Owning a home provides economic stability for middle-class families, builds wealth that can be transferred across generations, and encourages residents to maintain their properties and invest in their communities.

But in recent years it has become increasingly difficult for the average American family to become a homeowner. In response to the too-loose credit standards of the housing bubble, many mortgage lenders have overcorrected by extending credit to only the safest possible borrowers. Meanwhile, government regulators are writing rules that will likely determine who gets a mortgage for decades to come. There is also concern that excessively high down-payment requirements could lock many creditworthy families out of the market completely.

In designing the mortgage market of the future, policymakers must consider the right balance between reining in excessive risks and promoting reasonable access to mortgage credit, as well as the appropriate levels of homeownership versus rentership in our country.

CAP Policy Recommendation

Establish a new system of housing finance in the United States that reins in excessive risk-taking, supplies mortgage capital in every community even in times of economic duress, and preserves long-term, reasonably priced products like the 30-year, fixed-rate mortgage. (See: “A Responsible Market for Housing Finance,” 2011)

6.What do you plan to do with the government-backed mortgage giants Fannie Mae and Freddie Mac? If you plan to eliminate them, what will you replace them with and how will you transition to a new system without causing undue harm to the fragile housing market?

For decades, the government-controlled mortgage giants Fannie Mae and Freddie Mac have played a crucial role in the U.S. mortgage finance system as a “secondary mortgage market.” To help capital flow into the market, Fannie and Freddie purchase home loans made by private firms, provided they meet strict size, credit, and underwriting standards. They then guarantee timely payment of principal and interest on those loans, either as investments held in a portfolio or through mortgage-backed securities issued to outside investors. Since mortgage lenders no longer have to hold these loans on their balance sheets, they have capital available to make more loans to creditworthy borrowers.

In September 2008 Fannie and Freddie suffered massive losses as the housing market crumbled around them, forcing the federal government to take control of the companies through a legal process called conservatorship. Since then the government has backed nearly all home loans made in the United States, as investors have shown little appetite for purchasing mortgages without a government guarantee.

Just about everyone agrees that the current level of government support is unsustainable in the long run and private investors will eventually have to assume more risk in the mortgage market. But policymakers have yet to grapple with other important questions: What sort of presence should the federal government have in the housing market of the future? And when is the right time to start moving toward this new system of U.S. housing finance?

The answers to both questions will have major implications for the availability and affordability of mortgage finance—and thus access to homeownership—for millions of American families. For example, many experts believe that the 30-year fixed-rate mortgage, now a pillar of the U.S. housing market, would largely disappear without a government guarantee.

CAP Policy Recommendation

Gradually wind down Fannie Mae and Freddie Mac and replace them with a new system capitalized by private capital, with an explicit government backstop against catastrophic risk on certain well-regulated mortgage products. (See: John Griffith, “The $5 Trillion Question: What Should We Do with Fannie Mae and Freddie Mac?” (Washington: Center for American Progress, 2012))

7.At the peak of the housing bubble, more than half of subprime loans went to borrowers who could have qualified for conventional, safe mortgages, many of whom were borrowers of color. How do you plan to prevent racial and ethnic discrimination in the U.S. housing market and promote access to affordable, sustainable mortgages to all capable borrowers?

During the height of the housing bubble, loan originators backed by Wall Street capital often steered borrowers toward risky subprime loans, even when they qualified for better loans. These predatory products, such as adjustable-rate mortgages with pricing gimmicks, were designed to fail, both encouraging borrowers to borrow far more than they could manage and requiring the borrower to refinance every couple years. Not surprisingly, these loans defaulted at significantly higher rates than conventional mortgages.67 Borrowers of color were disproportionately targeted, as black and Hispanic borrowers were three times more likely to be steered to subprime loans than their white counterparts.

Regulators are finalizing new rules for the entire mortgage finance system, including bans on predatory lending by loan originators. In the meantime, private lenders have drastically scaled back lending activity by tightening underwriting standards for mortgage loans, with serious consequences for communities of color. For example, homeownership rates have declined by about 4.3 percentage points for black households since their peak, nearly double the decline for white households.

Racial disparity and discrimination in mortgage lending is nothing new, and efforts from federal and state governments during the 1990s and early 2000s made slow but sure headway in reducing the racial homeownership gap. But the recent crisis has erased most of that progress.

CAP Policy Recommendation

Vigorously implement key mortgage-market reforms laid out in the Dodd-Frank Act, including a requirement that lenders must ensure a borrower’s ability to pay back a home loan at the time of origination. Also, make fair and equitable access to affordable mortgage credit a key pillar of any future system of housing finance. (See: “A Responsible Market for Housing Finance,” 2011)

A moment of urgency

In recent months, several analysts have predicted that the housing market has finally bottomed out and that we’re now in the beginning stages of a housing recovery. We hope that’s true.

But even if the worst days are indeed behind us, the housing crisis is far from over. Millions of struggling families still risk losing their homes. Tens of millions of renters still face unmanageable housing costs. Countless more creditworthy families still dream of owning a home but can’t get approved for a mortgage.

Each of these problems has ripples beyond the housing market. Whether it’s a homeowner drowning in mortgage debt, a low-income family paying half their income on rent, or a potential homebuyer being closed out of the market, the crisis continues to stifle demand for goods and services, impeding efforts to grow and create jobs.

Our presidential hopefuls cannot stay silent on this critical issue. After months of arguing about tax reform, budget cuts, health care, outsourcing, and private equity, it’s time for housing to get its time in the spotlight.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress. Julia Gordon is the Center’s Director of Housing Finance and Policy. David Sanchez is a Special Assistant with the Center’s Economic Policy team.

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SOURCE: AP/Manuel Balce Ceneta

Federal Housing Finance Agency Acting Director Edward DeMarco, right, testifies on Capitol Hill in Washington before the Senate Banking Committee.

The federal regulator of mortgage finance giants Fannie Mae and Freddie Mac announced Tuesday that he would not allow them to reduce the loan balances of struggling borrowers, ending months of deliberation. That’s bad news for the 2.5 million Fannie- and Freddie-backed homeowners that are deeply “underwater,” meaning they owe significantly more than their homes are worth. This decision is bad for American taxpayers, too, who stand to save up to $1 billion from a well-designed principal reduction program at Fannie and Freddie, both of which are now under government conservatorship.

But it’s not time for the Obama administration and other proponents of principal reduction to throw in the towel quite yet. There’s still one way the administration can get its way: Instead of offering to pay for a portion of principal reductions using funds set aside for foreclosure prevention from the 2008 Wall Street bailout, they can offer to pay for all of it. By offering to cover up to 100 percent of the cost, the administration would overcome the regulatory agency’s main objection to loan principal reduction: the price.

Since 2011 the Federal Housing Finance Agency, or FHFA, has permitted Fannie Mae and Freddie Mac to participate in principal-reduction programs provided 100 percent of the cost of the write-down is covered by another source. Just this past spring, state housing agencies in Nevada and California took the federal agency up on this offer, using money from the Treasury Department’s Hardest Hit Fund to cover the cost of principal write-downs. “We think it’s great,” one FHFA official told The Wall Street Journal in June. “It’s what this money was distributed to these states for.”

From the agency’s perspective, the problem arises when Fannie and Freddie are asked to foot some of the bill. That’s where this week’s announcement comes in.

FHFA rejected Treasury’s offer to help pay for principal reductions

The Treasury Department in January offered to cover some of the cost of principal reductions at Fannie and Freddie through the Home Affordable Modification Program’s Principal Reduction Alternative, created in 2010 to help deeply underwater homeowners avoid unnecessary foreclosure. Treasury later offered to cover the administrative cost of implementing the program as well.

The Federal Housing Finance Agency’s much-anticipated analysis of that offer shows that Fannie and Freddie would save $3.6 billion by reducing principal for nearly half a million eligible borrowers who otherwise face foreclosure. As we’ve explained before, targeted principal reductions save money for investors by lowering monthly payments and improving the borrower’s equity position, increasing the likelihood of repayment.

Those savings were not large enough to sway regulators. In Tuesday’s statement from the acting director of the agency, Ed DeMarco, the agency “concluded that the anticipated benefits [of principal reduction] do not outweigh the costs and risks.”

The letter laid out two main reasons for its position. First, after accounting for government subsidies, implementation costs, reasonable take-up rates, and associated risks, there’s a chance the net benefit to taxpayers could be much smaller or even disappear. Second, the sudden availability of principal reductions for delinquent borrowers could encourage homeowners who don’t need financial help to purposely stop making their monthly payments, what many refer to as the “moral hazard” problem. Both of these objections are misguided.

FHFA needs to focus on its mandate, not fiscal policy

The Federal Housing Finance Agency’s analysis focuses heavily on the net cost to taxpayers. In other words, the analysis takes the expected savings to taxpayers due to limiting losses at Fannie and Freddie, and then subtracts the amount of money that would come from Treasury’s budget for the Home Affordable Modification Program, arguing that those funds also come from taxpayers. After accounting for those payments, the potential savings shrink from $3.6 billion to about $1 billion, according to the agency’s analysis, which DeMarco concluded was not worth the time, resources, and risks associated with implementing the program.

Saving taxpayers $1 billion in today’s fiscal environment certainly seems worthwhile, but regardless of the net outcome, subtracting the Treasury contribution from the total savings is inconsistent with agency’s mandate. The agency is charged with preserving and conserving the assets of Fannie Mae and Freddie Mac, promoting a stable and liquid mortgage market, and maximizing assistance to homeowners. Their analysis should focus on the program’s impact on Fannie, Freddie, and the broader housing market, not its effect on the federal deficit.

The housing finance agency has no business telling another agency how to spend its own money on foreclosure prevention. Indeed, if another agency can legally contribute funds to conserving Fannie and Freddie assets, then FHFA likely overstepped its statutory authority by declining that offer. Congress and the Obama administration in 2009 allocated $29.9 billion to the Treasury Department for the Home Affordable Modification Program for the express purpose of keeping troubled borrowers in their homes, and only about 10 percent has been spent so far.

Back in April, the FHFA seemed to understand this distinction. “Congress gave us a responsibility and a mandate,” DeMarco said in a speech at the Brookings Institution. “It gave the Treasury Department a different responsibility and mandate, and a different funding source. Our responsibility is to that of conservator.”

This week, that view appears to have changed.

Fannie and Freddie can easily mitigate the “moral hazard” problem

Borrower incentives have always been a key consideration in the debate over principal reduction. In his letter to lawmakers, DeMarco said that such a program “could give borrowers who are current on their mortgages a message that the government endorses forgiving a portion of mortgage debt if hardship can be demonstrated.” In fact, according to his agency’s analysis, if only a small number of current by underwater borrowers decided to default just to be eligible for a principal reduction then the initiative could result in a net loss to taxpayers.

While this concern is legitimate, it’s easily mitigated. As we explained in an op-ed this week in American Banker, Fannie and Freddie can structure a principal reduction program without creating skewed incentives for borrowers. The simplest solution is to make this a one-time program open to borrowers that are already delinquent when the program begins. No borrower would then be able to default intentionally just to be eligible.

Another solution is to impose some sort of fee on program participation, ensuring the borrower has to give up something valuable before receiving a principal reduction. In exchange for a write-down now, the borrower can give up a meaningful portion of any future price appreciation on the home, known as “shared appreciation.” Deeply underwater homeowners have reason to keep paying, while the modification is not particularly attractive to borrowers that don’t need it.

The Center for American Progress in March laid out how the shared appreciation model could work at Fannie and Freddie.

Treasury should make an offer FHFA cannot refuse

The decision this week by DeMarco and his agency is shortsighted. Wall Street analysts, economists, consumer advocates, and housing policy experts widely agree that homeowners who are underwater pose a continuing threat to the health of the housing market. Prices are not likely to hit 2006 heights again for quite some time; the losses are real, and they need to be accounted for in order for the market to remain stable over the long term.

Notwithstanding all the good reasons for the agency to reconsider its position, that’s unlikely to happen any time soon. Thus, the Treasury Department should bite the bullet and pay the full cost of principal reductions at Fannie and Freddie through the Home Affordable Modification Program.

There are two ways Treasury can accomplish this. Based on current program rules, Treasury covers between 18 cents and 63 cents on each dollar of forgiven through the program’s Principal Reduction Alternative. If the Federal Housing Finance Agency were to ratchet that number up to 100 cents on the dollar for certain Fannie- and Freddie-backed loans, then its cost concerns would no longer be an issue.

Alternatively, Treasury could just use funds from the standard Home Affordable Modification Program to pay off in full any amount that would otherwise be set aside as forbearance in Fannie and Freddie’s existing standard for this program. While borrowers would receive less forgiveness overall than through the Principal Reduction Alternative, it would place a much smaller operational burden on Fannie and Freddie. And since it works through an existing program, this approach would not require any changes to the servicing policies in place at Fannie and Freddie.

To put it bluntly, we’re quickly running out of options. If Treasury does not spend the Home Affordable Modification Program funds, the Obama administration cannot repurpose them to other housing assistance programs. And without the participation of Fannie and Freddie, which own or guarantee more than half of the mortgages in our country and traditionally set the industry standard for acceptable servicing practices, any principal reduction effort is unlikely to make a meaningful dent in the ongoing housing crisis.

This theoretical debate has gone on long enough. The longer it continues, the more American homeowners suffer. It’s time to bring the standoff to an end.

John Griffith is a Policy Analyst with the Housing Team at the Center for American Progress.

SOURCE: AP/ Pablo Martinez Monsivais

Twenty-one separate proposals aim to transition Fannie Mae and Freddie Mac to a new system of U.S. housing finance.

See also: Interactive: Comparing Fannie Mae and Freddie Mac Reform Plans

Download the details of all 21 reform plans (pdf)

For decades America’s system of housing finance was the envy of the world. But reckless behavior on Wall Street and weak oversight in Washington during the 1990s and 2000s contributed to an unprecedented bubble and bust in the U.S. mortgage market, resulting in financial catastrophe by 2008. Among the casualties were government-backed mortgage financiers Fannie Mae and Freddie Mac, whose losses landed them in government conservatorship, and the private mortgage-backed securities market, which has been all but nonexistent since the crisis began.

Nearly four years after the massive bank bailouts of 2008, more than 95 percent of all home loans are backed by Fannie Mae, Freddie Mac, or the Federal Housing Administration. The mortgage market remains on life support as investors have shown little appetite for purchasing mortgages without a government guarantee.

Just about everyone agrees that the current level of government support is unsustainable in the long run and that private investors will eventually have to assume more risk in the mortgage market. That leaves two critical questions before policymakers today: What sort of presence should the federal government have in the future housing market? And how do we transition responsibly to this new system of housing finance?

Since the conservatorship of Fannie and Freddie began, dozens of advocacy groups, academics, and industry stakeholders have offered possible answers to these questions. Below is a chart summarizing 21 plans aimed at overhauling the nation’s housing finance system. We analyzed each proposal’s market structure, government presence, and expected impact on the availability, affordability, and stability of mortgage credit. See summaries of all 21 plans in our user-friendly interactive here.

But before we go into the details, it’s important to understand a bit about how the mortgage market operates today, what role Fannie and Freddie play in that market, and how we got into this mess in the first place.

Background on Fannie Mae, Freddie Mac, and the recent housing crisis

The primary function of Fannie Mae and Freddie Mac since their creation has been to provide liquidity to the nation’s mortgage finance system. Fannie Mae and Freddie Mac purchase home loans made by private firms, provided they meet strict size, credit, and underwriting standards; package them into mortgage-backed securities; and guarantee the timely payment of principal and interest on those securities to outside investors. Fannie and Freddie also hold some home loans in their own investment portfolios. Since mortgage lenders no longer have to hold these loans on their balance sheets, they have capital available to make more loans to creditworthy borrowers.

Under this system, mortgage finance was continuously available well into the late 1990s under terms and at prices that made sustainable homeownership available to most American families. By the end of that decade, however, Wall Street had figured out how to purchase and securitize mortgages without needing Fannie and Freddie as intermediaries. As a consequence, Fannie and Freddie began to lose large chunks of market share to so-called “shadow banks”—private financial institutions such as Lehman Brothers and Bear Stearns that performed many of the core functions of banks but operated outside the regulated banking system.

During the housing bubble, loan originators backed by this private capital began peddling large quantities of high-risk subprime mortgages with terms and features that drastically increased the chance of default. Many of those loans were predatory products, such as adjustable-rate mortgages with pricing gimmicks designed to encourage potential homeowners to borrow far more than they could manage. Wall Street firms in turn packaged these high-risk loans into securities, paid the credit rating agencies to bless them, and then passed them along to investors who were often unaware or misinformed of the underlying risks.

It was the poor performance of those purely private, largely unregulated products—not those backed by Fannie and Freddie—that triggered the financial meltdown, according to the bipartisan Financial Crisis Inquiry Commission and other independent research. In an ill-fated effort to win back market share, however, Fannie and Freddie also made a few tragic mistakes.

Starting in 2006 and through 2007, just as the housing bubble was reaching its peak, Fannie and Freddie increased their leverage and began investing in subprime securities that credit agencies incorrectly deemed low risk. Fannie and Freddie also significantly watered down underwriting standards on mortgages that they would purchase and securitize. Most telling for Fannie and Freddie, unlike most private investment firms, the companies were not diversified and thus had no other sources of income beyond mortgages, leaving them exposed to enormous losses when the market crashed.

As a result of those losses, the Bush administration placed Fannie Mae and Freddie Mac into government conservatorship in September 2008, where they have remained, kept alive with taxpayer dollars. The two mortgage giants have so far required $188 billion in government support—money Fannie and Freddie are not expected to pay back anytime soon. They remain very large companies, owning or guaranteeing a combined $5 trillion in mortgage assets, about half of all outstanding home loans in the United States.

A path to reform

In January 2011 the Mortgage Finance Working Group—a progressive group of housing finance experts, affordable housing advocates, and leading academics sponsored by the Center for American Progress—released its plan for responsibly winding down Fannie Mae and Freddie Mac and bringing private capital back into the U.S. mortgage market. The plan lays out five guiding principles for any reform effort:

• Broad and consistent access to mortgage credit across all communities
• Stability in mortgage finance during all kinds of economic conditions
• Transparency and standardization of products that can be understood
• Access to affordable mortgage finance for both homeownership and rental housing
• Consumer protections to ensure that mortgage products and practices operate in the long-term best interests of borrowers

To achieve those goals, the working group suggests that any comprehensive plan for reform contain certain key components, including:

• An explicit government backstop on qualifying mortgage-backed securities and adequate pricing to cover its cost
• A framework through which private capital assumes first loss on those securities
• Provisions to promote liquidity during severe economic downturns
• Provisions to promote access and affordability for underserved segments of the market
• Provisions to support a liquid and affordable rental housing market
• A clear and responsible transition plan to wind down the existing structure (Fannie and Freddie) and to bring in private capital
• Strong and permanent government regulation and oversight

As seen in the following summary, most serious plans for reform share at least three of these components: a limited and explicit government guarantee; a bigger role for private capital; and careful government oversight. As Congress and the Obama administration consider the best path forward in the coming months, these areas of broad consensus can help focus the debate.

With the aforementioned benchmarks in mind, here’s how the CAP plan stacks up against other prominent proposals. You can compare the details with our interactive here, and a detailed summary of all 21 reform plans can be downloaded here.

This comparison is based on the structure of the new market, the government’s ongoing role, and the impact on the availability, affordability, and stability of mortgage credit.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress. Special thanks to David Min, Julia Gordon, Janneke Ratcliffe, David Sanchez, Geoff Minter, and Kerry Mitchell for their help with this project.

Download the details of all 21 reform plans (pdf)

See also: Interactive: Comparing Fannie Mae and Freddie Mac Reform Plans