June 7, 2010 – In a speech given today, FDIC Chairman Sheila Bair questioned the wisdom of government policies that over-subsidize home ownership while devoting insufficient attention to the need for affordable rental housing. The Chairman noted that expansive public and private efforts to push homeownership to a record level of 69% ultimately proved to be unsustainable, resulting in mortgage defaults and massive loan losses for the banking industry.
In a speech to the Washington based Housing Association of Non-Profit Developers, Ms. Bair discussed the current outlook for housing and provided recommendations to stabilize the housing market and prevent future problems for both banks and borrowers.
Chairman Bair noted that she has seen a gradual improvement in both the housing markets and economy, but major uncertainties and risks are still unresolved. Banks are still struggling with nonperforming loans even as the housing market shows signs of stabilizing. One major indication that the housing crisis is far from over is shown by the large number of current and potential foreclosures. Ms. Bair noted that “Today, more than 11 million homeowners – or more than one in four of those with a mortgage – are underwater, owing more than their home is worth. At the end March, there were some 2.4 million mortgages in foreclosure, and almost three and a half million more were at least 60 days past due.” The FDIC Chairman suggested that aggressive loan modification efforts by both the Treasury and the FDIC have made substantial progress in preventing further foreclosures.
Chairman Bair’s three recommendations to stabilize housing and the mortgage industry going forward are to protect and educate the consumer, restart the securitization of mortgage loans and re-evaluate the government’s basic goals and strategies regarding housing policy.
Instrumental to mortgage reform, according to Ms. Bair, is the education and protection of the consumer. Ms. Bair stated that “Somewhere along the line, the industry forgot that the ultimate purpose of mortgage finance is to meet the credit needs of the American people… But most consumers are not Wall Street financial wizards. They want simple mortgage structures and straightforward disclosures that are designed to clarify – not obscure – the true nature of the deal. When consumers lack a clear understanding of the deal, they are more likely to default, as so many consumers have in this crisis who had subprime and nontraditional loans. Financial education can do a great deal to help consumers make informed financial decisions and protect themselves.”
In order to provide a smooth flow of necessary private capital to the mortgage markets, the Chairman noted the need to once again allow mortgages to be securitized. “But in today’s world of global finance, securitization remains the best way to tap large volumes of capital at the lowest possible cost. Right now, private securitization of nonconforming loans remains largely shut down. Investors have lost faith in a process where the financial incentives — between lenders, underwriters, ratings agencies, and investors — are badly misaligned.”
“We need a whole new set of transparent market practices. We need higher standards for loan underwriting and documentation. Loan originators need to keep some skin in the game and not be able to walk away from the long-term consequences of their decisions.”
Chairman Bair’s final recommendation is to examine whether too much capital and subsidies are being extended to homeowners at the expense of renters. “For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers. While tax deductions for interest on most forms of consumer debt have been curtailed, the home mortgage interest deduction lives on. Local property taxes are also deductible, as are capital gains up to $250,000. In the end, these public and private efforts helped to briefly push the homeownership rate as high as 69 percent. That’s a level that ultimately proved unsustainable, and that may not be reached again for many years, if ever.”
Chairman Bair noted that the combined benefit of deductible mortgage interest and property tax plus the capital gains exclusion on the sale of owner occupied property results in taxpayer subsidies for homeowners three times the size of rental subsidies. The unintended consequences of government incentives to own plus easy credit helped to push the cost of homeownership beyond the reach of many families, thus negating the original government efforts to keep housing affordable.
Chairman Bair concluded her remarks by noting that better times will “inevitably” return to the housing and mortgage markets, but that the lessons of the housing crisis should never be forgotten.