A collapsed housing market sent the national economy into a tailspin in 2007-08. Five years after the Great Recession, analysts point to a weak housing market as a major factor in the slower-than-usual economic recovery, progress slowed by millions of underwater mortgage loans and foreclosures. Disappointing, too, federal policies to ease the crisis, such as the Home Affordable Refinance and Home Affordable Mortgage programs, have been just moderately successful.
Thus, it stands to reason that President Obama would highlight, as he did in Phoenix last week, the need to revamp mortgage financing as a priority for robust economic recovery.
The plan the president outlined has much to recommend it. He rightly seeks an end to an arrangement that leaves the federal government on the hook to cover bad loans made by Freddie Mac and Fannie Mae, the “not really government but not really private” mortgage-financing companies. The feds practically acquired the companies in a bailout in 2009 to help stabilize an imploding mortgage market. The result is nearly 90 percent of new mortgages now are backed by the federal government, exposing the government to huge financial risks in the event of another downturn.
Obama insists correctly that private lending should be the backbone of mortgage financing, the government playing a limited role as a last resort. The challenge the White House and Congress have yet to address is to craft parameters that would attract into the mortgage market sufficient private capital and investors willing to assume most of the risk of home financing.
Creating a solid private-backed financing structure in place of Freddie and Fannie is particularly important, especially because Obama wants also to retain at affordable rates the wildly popular 30-year fixed mortgage rate that anchors the concept of middle-class homeownership.
As important, a retooled financing system must face up to the ambivalence in federal policy over homeownership. Owning one’s home is regarded as the cornerstone of the American Dream. As analysts have noted, the sentiment has been a contributing factor to the housing bubble and the foreclosure crisis, along with the myriad abuses of mortgage lenders, driving workers to assume long-term debts they cannot afford or may not need.
Federal policies, such as tax deductions and subsidies, largely favor home ownership over renting. Though roughly one-third of households are renters, federal spending on rental housing amounts to less than a quarter of the assistance for homeownership. The president indicates he plans to boost the availability of rental housing and assistance.
As the signs increase that the economy is growing stronger, it gives hope that Capitol Hill and the White House both are renewing efforts to tackle the flaws that fueled the housing debacle.