Our Homeownership Society: Is It Coming to an End?

homeownershipAfter months of processing the input from the Conference on the Future of Housing Finance, as well as countless hours of speaking with various lobbyists from innumerable organizations behind the scenes (resulting, no doubt, in the premature death of many thousands of $250 bottles of wine), the Obama administration finally unveiled its plan for the future of real estate finance.

Or, rather, it unveiled not just one, not merely two, but three plans.

There are some persnickety evildoers who might consider such a thing a "total lack of leadership." They would be dead wrong. Leadership doesn't necessarily mean loudly leading from the front; it could also mean the quiet leadership of letting people choose where they want to go, then following along claiming to have led them there in the first place.

So what are the three plans? You might call them the "Let's Hope the Republicans Go For This," the "We're Not Real Sure, Either," and the "Let's Just Make It Palin's Problem in 2020."

The Wall Street Journal reports:

The administration's proposal to Congress is likely to assess the merits and drawbacks of each of the three options. The most conservative would propose no government role in the mortgage market beyond existing federal agencies, such as the Federal Housing Administration.

The two others would create a way for the government to backstop part of the secondary mortgage market, a role long filled by Fannie and Freddie. Under one, that government backstop would kick in primarily during periods of market stress; under the other, the government would play a role at all times.

Option One is probably political suicide: The housing lobbies would absolutely go to war over a zero-government proposal, and the finance markets are likely to seize up for a bit. Sure, with
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time and perspective, the residential mortgage market would return. But it wouldn't look anything like what we have today. We're talking about perhaps 10-year terms, no more fixed rate loans, and 30 percent down payment requirements. Should the Tea Party Republican-led Congress choose this option, the resulting economic devastation would likely strengthen the argument of those who would point and say, "See what happens when we just cut government out?" Knowing this, I assume this option is a nonstarter for anyone involved, at least in the next several years.

Option Three -- where government backstop "plays a role at all times" -- sounds a whole lot like kicking the can down the road. It is, more or less, what happens today: 9 out of 10 loans in the past year were funded by the Treasury (through Fannie, Freddie, and other agencies). The details are missing, but nothing substantive would change and Obama would just pass along the problem of what the role and scope of the Federal government is in financing housing to 2012 and beyond.

Option Two is the most intriguing, and is likely what the administration would like Congress and Republicans to accept: government as a backstop only in "periods of market stress." The trouble is, until we read the white paper, no one knows what that means. Is today's economy a "period of market stress"? What if unemployment goes to 8 percent? Is that a period of market stress? Who would decide and declare a "market stress event" to trigger the Treasury backstop? Therefore, it's the "We're Not Real Sure, Either" plan; or perhaps the, "Trust Me, I'm From the Government" plan.

Whichever plan is selected, they each gives a sense that the Sustainable Homeownership Society envisioned by the Obama administration will be moving ahead:

•Maximum loan limits for agency purchase will be lowered.
•Fannie, Freddie and other agencies will raise the fees for mortgage guarantees and couple such price increases to higher down payments. This means higher downpayments, since loans with lower LTV have less default risk, making mortgage insurance cheaper.
•GSEs and agencies will reduce their holdings of mortgages. (Wait, weren't they already doing this? I suppose the signal here is that the agencies are just not all that interested in buying more mortgages....)

The upshot is lower buyer demand across the board. But on the other hand, buyer quality would go up, as the marginal buyers simply couldn't get a mortgage. This is, after all, the whole point of Sustainable Homeownership.

Before y'all panic and start stockpiling canned foods, let's remember that this is just the first step. There are many, many steps between this and actual legislation. And folks like the NAR, NAHB, MBA, and various other real estateplayers will have their say, and their say, and then some more say, before it's all said and done.

But the game is now officially on. To quote Bud Light, then, "Here we go!"

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