The latest House Republican budget plan asks low-income and middle-class Americans to shoulder the entire burden of deficit reduction while simultaneously delivering massive tax breaks to the richest 1 percent and preserving huge giveaways to Big Oil. It’s a recipe for repeating the mistakes of the Bush administration, during which middle-class incomes stagnated and only the privileged few enjoyed enormous gains.
Each component of the new House Republican budget threatens the middle class while doing nothing to add jobs or grow our economy. It ends the guarantee of decent insurance for senior citizens, breaking Medicare’s bedrock promise. It slashes investments in education, infrastructure, and basic research, all of which are key drivers of economic growth and mobility. And it cuts taxes for those at the top, asking the middle class to pick up the tab. It’s a budget designed to benefit the top 1 percent at everyone else’s expense.
When House Republican leadership unveiled its latest budget proposal this week, the plan drew fire for its inequitable tax plan, unbalanced approach to deficit reduction, and desertion of promises to our seniors. But little attention went to another problem: The plan will cripple the U.S. housing market.
The new plan—authored by House Budget Committee Chairman Paul Ryan (R-WI) reportedly after consultation with leading Republican presidential candidates—proposes to aggressively scale back the federal government’s role in the mortgage markets at a time when home prices are still falling, millions of American families are still at serious risk of losing their homes, and private capital for mortgages is mostly unavailable.
Similar to many other areas of his budget, Rep. Ryan offers few details but generally calls for shrinking the purchases of mortgage-related investments made by the government-controlled mortgage companies Fannie Mae and Freddie Mac. The plan also imposes ill-considered accounting rules that would severely restrict the services provided by the Federal Housing Administration, the government mortgage insurer that helps make homeownership possible for millions of families.
There are three main reasons that an effort to rapidly scale back the mortgage market could derail a housing recovery:
- Federal support is keeping the housing market alive today.
- There’s no evidence that private money could fill the void if government-backed mortgages disappeared.
- Proposed “fair value” accounting rules would unnecessarily weaken FHA’s ability to stabilize the market and make homeownership possible for more Americans.
Let’s take a look at each in turn.
First, the federal government is the only thing keeping the housing market going today. In the wake of the housing crisis of 2006 and 2007, most private lenders and guarantors withdrew from the market—leaving Fannie, Freddie, and FHA to pick up the slack. As a result the three government-backed entities guaranteed more than 90 percent of all mortgage originations in 2011.
Nearly everyone agrees that this level of government support is not sustainable in the long run, and private capital will eventually have to return to the mortgage market. But this transition must be undertaken with care—hasty congressional actions could cause house prices to fall even further.
Now is clearly not the time to test the market’s strength. Home prices are still down more than 30 percent from their peak in 2006 and were still declining at the end of 2011. Nearly one in four homeowners is “underwater,” meaning they owe more on their mortgage than their home is worth, and more than 7 million homes are still in the foreclosure pipeline, according to analysis from Morgan Stanley. The Center for Responsible Lending estimates that we’re actually only halfway through the foreclosure crisis.
Second, purely private sources of mortgage finance are not in a position to fill the void that would be left by a diminished or eliminated Fannie, Freddie, or FHA. Without the federal government’s crucial provision of credit—which Rep. Ryan proposes to largely remove—virtually all of the mortgage finance that is currently available would disappear, crippling the housing market.
Some conservative analysts have argued that private capital is being crowded out by the government, isolating it to the wealthiest segments of the mortgage market not covered by a government guarantee. When you scale back the government guarantee, you’ll see private capital trickle in—or so the conservative logic goes. But there’s no reason to believe that is actually the case.
As Federal Reserve Chairman Ben Bernanke noted last month, private mortgage credit has become very scarce, in part because private-label securitization—through which mortgage loans without a government guarantee are packaged and sold to investors—is virtually nonexistent today. Another reason for the scarcity is extraordinarily tight underwriting by lenders who are arguably overreacting to the loose standards of the housing boom.
Third, the plan’s proposed accounting rules would stifle the Federal Housing Administration—which has operated without taxpayer support for 77 years—at a critical time. The House budget plan would mandate so-called “fair-value” reporting for FHA mortgage insurance programs—Washington parlance for an accounting trick that makes credit programs appear more expensive than they truly are. The new rules would add budgetary costs based on the higher rates private mortgage insurers would charge for the same service even though FHA’s actual costs are lower.
CAP recently identified several flaws in the rationale for “fair-value” accounting, including the ways such rules undo sound cost-based budgeting. Most troubling is the rule’s potential impact on the scope of FHA insurance programs. Under current budget rules FHA’s single-family mortgage insurance program is expected to produce budgetary savings of $4.4 billion in fiscal year 2012, mostly from fees collected from mortgage lenders. When calculated on a “fair-value” basis, however, the program would have a mythical cost of $3.5 billion in 2012, according to the bipartisan Congressional Budget Office.
The agency would likely have to cover these phantom “losses” by increasing fees on homeowners or tightening underwriting standards. That’s because FHA cannot insure a book of loans that’s expected to lose money without congressional appropriations, which are highly unlikely in the current Congress.
Fee hikes or more restrictive lending would further scale back the government’s critical support to the struggling housing market. That’s especially troubling at a time when FHA has been guaranteeing approximately 40 percent of home-purchase loans, including 56 percent of first-time homebuyer loans.
With this budget plan, Rep. Ryan and his conservative colleagues are playing a dangerous game with our fragile housing market. Instead of returning to the destructive days of the mid-2000s when the purely private sector dominated the mortgage system, we now have the opportunity to transition to a more responsible system of housing finance that works better for more Americans. Government must play a critical role in that future system, promoting liquidity, stability, transparency, access, and consumer protections.
David Min is the Associate Director of Financial Markets Policy at the Center for American Progress. John Griffith is a Policy Analyst with the Center’s Housing team.
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