The Housing Bust: Still No Real Policy to Address It

The Housing Bust: Still No Real Policy to Address It

The collapse in our housing sector has gone on for six years, ushering in the most terrible recession in decades. Astonishingly, the Obama administration has yet to define a housing policy or to attempt any meaningful overhaul of the initiatives and organizations that got us into this mess.

Where is our housing czar? A small point, perhaps, but for a White House teeming with Russian-style executive appointments, the omission is telling. We have czars for drugs, technology, cars, education, ethics – we even have a Great Lakes czar, for heaven’s sake. But no housing czar.

Go onto the White House website and click on the “Issues” tab. Among the topics listed are: civil rights, defense, women, family, immigration and service. Housing didn’t make the cut.

As a country, we haven’t been willing to confront the real costs of our determination to broaden home ownership, which include diverting capital from other objectives, such as modernizing infrastructure. We consider it a given that a rising portion of the population should be encouraged to buy houses, assuming that such investment is essential to a tight-knit social fabric. Unhappily, the housing downturn has proved how quickly that fabric can unravel. Our focus, to this day, has been on how to best finance such expansion, and how to save those caught up in the storm.

The administration has encouraged loan modification programs and helped keep interest rates low, which helped many keep their homes. But these efforts are akin to bailing water from a flooded dinghy with a Dixie cup; we haven’t yet stabilized the market nor come close to solving the underlying problem. And we have not debated the goal of increasing home ownership itself.

We have financial conduits a-plenty. But who decides what portion of Americans’ savings should flow into housing? Or foreign capital for that matter. In retrospect, far too much of our country’s capital went to building homes and condominiums. Mortgage debt outstanding today totals almost $11 trillion. That compares to total bank deposits of less than $8 trillion. Annaly Capital’s Mike Farrell, CEO of the real estate investment trust that invests in mortgages, points out in a note to investors that historically, the mortgage-to-deposit ratio in FDIC-insured banks averages 25 percent. Farrell says that some $8 trillion was pulled in from other sources to fund the housing boom – attracted by relatively high yields and presumed low risks. Most of that money is invested in mortgage-backed securities. The Fed, in its attempts to stabilize the housing collapse, owns 23 percent of those securities, banks 22 percent, foreigners have 22 percent and the GSEs are carrying 14 percent of the total.

Our financial institutions became enablers. Leading the charge were  Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) meant to funnel capital into the housing sector by providing a quasi-governmental guarantee of mortgage debt. We all know, after the fact, “quasi” became “actual” when housing prices collapsed. That possibility, amazingly, had never been contemplated by those running these institutions, or by those in Congress who encouraged unsafe lending as part of greater social policy.

There is also the Federal Deposit Insurance Corp., which, along with insuring bank deposits, is charged with supervising banks that, among other things, provide loans to the housing sector. The FDIC didn’t see the downturn coming either. Notwithstanding that lapse, its chairwoman, Sheila Bair, now stands ready to expand her turf and take on more vigilance. There is also the Dept. of Housing and Urban Development, and within it the Federal Housing Administration. On its website, HUD boasts that “unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan.” In retrospect, that seems an unseemly come-on from the government. A page on that website describing the FHA notes that content is “current as of 6 September 2006.” Maybe I goofed and clicked on the wrong web address; surely the FHA is not that far behind the eight ball.

While money was pouring into housing developments, the country’s infrastructure went begging. Investment needed to restore essentials like airports, schools and roads is now estimated at more than $2 trillion over the next five years. Martin Koffel, CEO of engineering and construction firm URS Corp., said in a speech this spring that China’s investment in non-residential infrastructure has amounted to 5 percent of GDP; in the U.S. we have dedicated only 1.5 percent of our economic output to this purpose. We have paid a price for this skewing of investment. Our sagging modernization has undermined our ability to compete in the global marketplace. This in turn has jacked up unemployment, which in turn exaggerated the housing disaster.

The cycle is indeed a vicious one. Much has been said about Congress’ failure to overhaul the GSEs as part of the 2,000-page financial reform bill. It is a surprising oversight, considering that the GSEs drove the funds that created the mortgages that swelled the housing prices that created the bubble…and so on. The truth is that Congress has no stomach for the fight. Low-rate mortgages and favorable tax treatment of mortgage interest are among the country’s great entitlements – even if most Americans never acknowledge the gift. Tackling Medicare, by comparison, looks like child’s play.