Efforts to diminish their GSE status or misguided attempts to overhaul their regulatory oversight could impair the ability of these enterprises to perform their critical role in the housing finance system. Changing the GSEs’ agency status or removing the housing perspective from their regulatory oversight could have negative ramifications on the housing finance system. Some of these negative impacts could include higher mortgage rates, increased volatility in the cost and availability of mortgage credit (especially for affordable housing), lower homeownership rates, fewer affordable rental units and reduced mortgage product and technological innovations.
MR. CROWE: It has been widely acknowledged that housing has played a particularly important role over the past couple of years in keeping the economy stronger than it would otherwise have been. How has government policy contributed to this effort? And what role do you think the housing GSEs have played?
MR. HOWARD: Housing has been huge, and NAHB is pleased there is such wide recognition that the housing market has been the key engine of growth in recent years. The housing sector continued to excel in 2003, with new home sales achieving a record performance of more than a million closings. Single-family home construction totaled nearly 1.5 million units in 2003 and multifamily activity, while more subdued, still posted a respectable showing, pushing total housing starts above 1.8 million units.
While low interest rates and favorable demographics spurred demand, these results would not have been possible without the support of the finance system for housing. The effectiveness and resilience of this system is the result of a steadfast commitment of federal policy makers to improving the nation’s housing conditions and opportunities. The bedrock of the housing finance system is a liquid and vibrant secondary market that is the product of the activities of Fannie Mae and Freddie Mac. These enterprises have not only contributed to the affordability of housing credit, but also have taken the lead in expanding the menu of affordable housing programs and products. The Federal Home Loan Banks also continue to play an important role both by providing liquidity to housing lenders and by developing innovative programs to address housing needs.
MR. CROWE: What is the housing industry’s view of the wide range of federal policies that support a strong housing delivery system — everything from the mortgage interest tax deduction, to the Low Income Housing Tax Credit, to housing’s share of the federal budget and the government’s support of the housing GSEs? Are there ways in which the federal government could improve its support?
MR. HOWARD: The United States’ housing delivery system exemplifies a healthy balance of private and public resources that provides greater housing opportunities for all. The federal government’s support of the housing finance system, in partnership with financial institutions, and via the provisions of mortgage insurance and guarantees, is crucial to a stable and growing secondary market.
As I mentioned, government-sponsored enterprises provide critical links between the national and global financial markets and the housing finance system, further enhancing stability and growth. And direct federal expenditures serve to reduce the cost of decent and safe housing to affordable levels.
Finally, the U.S. tax system has been used for decades as an effective and efficient policy tool that expands housing opportunities without elaborate and expensive bureaucracies. Tax incentives distill public policy goals into economic terms, and tax payers react in the marketplace as they would to any other economic signal.
While we are the best-housed nation, there’s always room for improvement. For example many well-intentioned federal regulations, primarily aimed at environmental concerns, have unintended adverse impacts on housing affordability. We believe that environmental protection can be equally effective if the economic impact of these laws and regulations is evaluated against the environmental benefit. This is not currently required, but should be.
Also, housing policy should undergo review and refinement as housing and community development needs shift and evolve. The housing “rocket scientists” have come up with an idea for a new tax credit to spur minority homeownership and economic revitalization of downtrodden communities, and legislation to establish such a program is now before Congress. We need to continue to add new housing policy tools, as well as fine tune the proven mechanisms.
MR. CROWE: To what extent are you concerned about the current condition or operation of Fannie and Freddie?
MR. HOWARD: We are not aware that anyone, even Fannie’s and Freddie’s harshest critics, is claiming that a crisis is looming. These companies are in solid condition, as OFHEO continues to certify. The accounting problems at Freddie Mac certainly are real, but it’s a case of being more profitable than previously stated. Both companies continue to meet very tough capital tests with flying colors and we see no evidence of erosion in their financial health. We wish other companies were in as good a shape.
MR. CROWE: The housing industry has been adamant in its opposition to taking control of the GSE programs away from HUD and putting it in the hands of the Treasury. Why is it so important for this authority to remain at HUD?
MR. HOWARD: It’s quite simple — HUD is the only cabinet agency with a thorough understanding of, and extensive involvement in, housing-related issues. I have a high regard for the Treasury’s ability to oversee the safety and soundness of Fannie Mae and Freddie Mac’s operations. But those who care about housing are extremely skeptical of Treasury’s intentions in volunteering to be a “world-class” housing-GSE regulator because, time and again, they have expressed an anti-housing bias in their policy statements and actions. This is a historic bias that goes back for decades and has been apparent in both Democratic and Republican Administrations.
That just doesn’t seem like the kind of regulator you want to have in charge of deciding the types of things Freddie, Fannie and the FHLBanks can and cannot do. NAHB strongly believes that Fannie Mae’s and Freddie Mac’s ability to spur innovative solutions and to develop new products that increase homeownership will continue only if the mission of these corporations is regulated by an agency that understands and is immersed in housing-related issues.
HUD has proven itself to possess the capacity to adequately evaluate the potential benefits to housing from the GSEs’ innovation and advancement in products and to ensure that the GSEs do not stray from their statutory mission. To make a good thing better, HUD’s program oversight could be strengthened through the establishment of an independently funded office within HUD. Having an office within HUD dedicated to mission oversight of Fannie and Freddie would be preferable to the current situation where GSE oversight is conducted through the Office of Housing with few dedicated staff and staff from other HUD offices are detailed on an ad hoc basis for GSE oversight duties.
Of course, there would be staffing, administrative and operational costs to achieve this increased regulatory scrutiny. One way to minimize the costs to taxpayers is to handle it by assessing Fannie Mae and Freddie Mac to fund the new HUD office.
The new program approval process is another area where it seems like people are trying to substitute regulatory bureaucracy for common sense. The current process rightfully limits prior approval to new programs, which are defined as very broad undertakings unlike what is currently being done. Others are proposing to significantly broaden what would have to be approved to include any new business activities. Submitting each new activity to the approval process envisioned by the Administration would result in such micromanagement of the GSEs’ innovations that they would be unable to respond to changing market conditions in a timely fashion. The result would be to stifle or severely inhibit development and implementation of valuable new mortgage products and technological innovations that have helped to dramatically expand homeownership in the country.
MR. CROWE: There has been speculation in the media and in Congress about what an independent regulator would look like and that it could possibly be a board. Is there possibly room there to compromise? Given that there are some strong differences between the Administration and the housing industry and within Congress about the role of a new independent GSE regulator, particularly over the issue of program oversight, do you perceive any common ground between these two views that might suggest the possibility of a compromise?
MR. HOWARD: The discussions about who should regulate the housing GSEs have been like performing exploratory surgery on the central nervous system of the housing industry and the economy in general. No one wants to jeopardize the housing finance system that is the envy of the world. But, many people feel passionate about their views. And rightly so. After all, we’re not talking about widgets, we’re talking about peoples’ homes.
Here is NAHB’s perspective plain and simple: the regulatory framework for the GSEs should be credible and effective to ensure these organizations fulfill their mission in a safe and sound manner. If every policy maker focuses on this goal, I’m certain the outcome will be a world-class regulator. Things get bogged down when people focus on protecting their turf. I’m pleased that the Administration, lawmakers and key policy makers have resumed discussions.
As I mentioned before, NAHB strongly believes that HUD is the appropriate agency to regulate the mission of Fannie Mae and Freddie Mac, including approving new programs and establishing affordable housing goals. However, we’d be willing to explore the feasibility of establishing an independent GSE regulator outside of Treasury so long as that entity has a thorough understanding of and extensive involvement in housing-related issues. The regulator could be structured with a governing board of directors that includes HUD officials and representatives from the housing sector on the board to ensure the GSE regulator possesses sufficient housing-related expertise.
MR. CROWE: Treasury Assistant Secretary Wayne Abernathy has suggested that there might be a role for the housing industry in the discussion over how the new regulator is set up? What do you believe the industry’s role should be and what points do you believe need to be emphasized if that dialogue should arise?
MR. HOWARD: I wouldn’t say there “might” be a role. I’d say there must be a role. It would be a huge mistake to turn discussion on GSE regulation into a free-for-all referendum of our highly successful housing finance system. Decisions that have not been vetted by those who will have to live with them could have catastrophic consequences for housing. NAHB urges a careful and thoughtful approach on GSE regulation and believes such a course will produce tremendous rewards to those with most at stake in the process — America’s home owners and renters.
NAHB’s involvement in the discussion over how the new regulator is set up would add the wisdom, knowledge and experience of over 215,000 direct participants in the production of housing and related activities. In fact, here is what NAHB members believe should be the guiding principles of the GSE regulatory reform debate:
The first principle is that the GSE status of these institutions must be maintained. Efforts to privatize, withdraw any of the federal privileges and legal exemptions or otherwise diminish the ability of the GSEs to provide housing financing at the lowest possible cost should be opposed.
Our second guiding principle is that the GSEs should fulfill their public mission by conducting activities authorized by their charters in a safe and sound manner and by promoting access to mortgage credit to address the needs of affordable housing throughout the nation.
Third on our list of principles for reform efforts is that the regulatory framework of the GSEs should be strong and credible, possess adequate authority and resources and reflect the differences inherent in the charters and operating structures of the GSEs. Further, the regulatory framework should foster competition among the GSEs to develop and implement innovative, low-cost funding and other programs to meet the nation’s housing credit needs.
Fourth, the mission oversight of Fannie Mae and Freddie Mac (including approval of new programs and enforcement of affordable housing goals) should be conducted by the Department of Housing and Urban Development or another entity with a thorough understanding of, and extensive involvement in, housing-related issues.
Fifth, we believe that the safety and soundness oversight of Fannie Mae and Freddie Mac should be conducted by an independent regulatory agency through rigorous examinations, enforcement of regulations (including capital standards) and transparency, without unnecessarily impairing the ability of these GSEs to accomplish their mission.
The sixth of our guiding principles is that the recently implemented risk-based capital standards for Fannie Mae and Freddie Mac should be allowed to remain in place for a period of time sufficient to evaluate the effectiveness of the new standards.
And seventh, the regulation of the mission and safety and soundness of the Federal Home Loan Bank System should reflect the uniqueness of the system’s mission, cooperative operating structure, charter type and other characteristics. This is best accomplished by having a regulator dedicated solely to FHLBank System oversight or by having a separate FHLBank System oversight division if a single agency regulates all of the housing GSEs.
To read an accompanying interview with Assistant Treasury Secretary Wayne Abernathy, click here.
[ Go to Top ]