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On the House: Reducing U.S. role in housing could bring pain

Every time I read something about real estate these days, I remember a 6-year-old named Mary Doris, who lived across the street when I was growing up.

Every time I read something about real estate these days, I remember a 6-year-old named Mary Doris, who lived across the street when I was growing up.

All the children in our neighborhood had nicknames based on their defining characteristics, and Mary Doris was called "The Whiner."

She would whine about everything: not being included in games; not being allowed to ride her bike off the street; not being given the other Yodel in the package.

The list was endless, and the whine was that of a router cutting through mahogany.

Lately, there's been whining by some groups about the gradual - and that's the operative word - reduction of government involvement in housing.

If you are not familiar with the issue, the goal is, in the words of Treasury Secretary Timothy Geithner, to shrink the government's footprint in the housing market to make way for more private capital.

Right now, the government guarantees nine in 10 mortgages. That means taxpayers shoulder the full cost of the financial crisis, from bailing out lenders to modifying and refinancing troubled mortgages, and everything in between.

The reforms in question would reduce the maximum size of loans that Fannie Mae and Freddie Mac can guarantee and phase in a 10 percent down-payment requirement for Fannie and Freddie borrowers "to further protect taxpayers," Geithner said.

But those changes, the housing industry complains, would further delay real estate recovery. Increasing down payments and reducing the amount of conforming loans would shut out the cash-poor first-time buyer and people in high-priced areas, they say.

Maybe that's not a totally bad thing, Mary Doris.

Economist Anthony Sanders, a professor of real estate finance at George Mason University, maintains that, aside from saving U.S. taxpayers hundreds of billions of dollars, not much would change in a world without those government-sponsored enterprises [GSEs], Fannie and Freddie.

"After pumping trillions into the mortgage market since 1998 through the GSEs, the homeownership rate is back to 1998 levels," Sanders said. "Enormous pain and suffering occurred trying to go from 66 percent to 70 percent homeownership."

Changes will be gradual. A lot of pressure is being exerted to reduce government spending and the ever-increasing deficit, and having the private sector share even reduced risk with the taxpayer appears to many to be a reasonable goal.

Though the whining is annoying, it is also perhaps understandable.

So far, the government doesn't have a great track record solving housing's problems. The Home Affordable Mortgage Program, designed to keep people in their homes through loan modification, has helped relatively few.

The federal tax credit to kick-start sales worked until it went away, cost us all billions, and did little for the new-home industry. It simply shifted sales to the first four months of 2010 from the last half of the year and the first three months of 2011. Sales volume, even with millions of distressed properties going real cheap, slowed the decline in home values for a time, but then they resumed their fall.

Efforts to regulate housing finance since the bubble burst haven't worked, either. Lenders, waiting to see the new rules of reform, remain tight-fisted with home buyers and residential builders.

As economist Mark Zandi observes, success in reforming the system requires a balance between the benefits of the private sector and the backstop of the government.

If that balance is not achieved, it could mean the end of fixed-rate mortgages and higher interest rates, he said.

Based on the government's record, start whining now.

On the House:

Inquirer real estate writer Alan J. Heavens is the author of "Remodeling on the Money" (Kaplan Publishing). His home improvement column appears Fridays in Home & Design.