FDIC: More Attention Must Be Given To Affordable Housing and Borrower Education

While she stopped just short of the mark, Federal Deposit Insurance Corporation Chairperson Sheila C. Bair came close to suggesting Monday that the government put less emphasis on home ownership in favor of promoting rental housing.

This was one of three recommendations for putting the mortgage industry on sounder footing that Bair made in remarks to the Housing Association of Non-Profit Developers at their Annual Meeting.  Bair said that the industry must also restart securitization of both conforming and nonconforming loans, and do more to educate and protect the consumer.  

The Chairperson said that for the last quarter century the federal government has focused its housing policies on promoting homeownership and the availability of credit to homebuyers.  The establishment of government sponsored housing enterprises Freddie Mac and Fannie Mae and the implied federal guarantee that contributed to their success encouraged risky private securitization which, in turn, fostered the expansion of cheap credit to homebuyers. The massive infusion of federal money into keeping those enterprises viable over the last two years essentially confirmed those implied guarantees. 

The government has also promoted homeownership with tax deductions for mortgage interest and local property taxes, continuing the mortgage interest deductions long after the deductibility of other types of interest ceased and granting a $250,000 capital gains exclusion on the sale of a home. "In the end," Bair said, "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.'

It should be asked, she said, whether federal policy is devoting sufficient emphasis to the expansion of quality, affordable rental housing.  It is estimated that all of the tax deductions and exclusions on capital gains add up to taxpayer subsidies for homeowners about three times the size of all rental subsidies and tax incentives combined. READ MORE ABOUT THE DEARTH OF AFFORDABLE RENTAL HOUSING

"In fact," she said, "you can argue that this huge subsidy for homeowners has helped push up housing prices over time, making affordability that much more of a problem for the very groups you're trying to serve. I think we need a better balance. Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may NOT be the right answer.

Bair said that securitization and the complex instruments that accompany it have been vilified, and rightly so in many cases, for triggering the recent financial crisis.  Mortgage securitization went far beyond the GSEs during the lead up to the latest crisis, with private issuers doubling their share of total mortgage debt to more than 20 percent of the market between 2003 and 2006. "This two-trillion-dollar river of credit, running right through the heart of Wall Street, provided the financing for most of the subprime and nontraditional loans that triggered the crisis."

But securitization remains the best way to tap large volumes of capital at the lowest possible cost.  She said that private securitization is, at present, essentially shut down because investors have lost faith in the process.  A new set of transparent practices including higher standards for loan underwriting and documentation are needed to restore balance between lenders, underwriters, rating agencies, and investors.  Loan officers, she said, must also keep some skin in the game and not be able to walk away from the long-term consequences of their decisions.

A change in accounting standards has given FDIC what she called a unique opportunity to lead the way in reforming securitization.  Under proposed new rules that govern how the agency handles securitized assets in a failed bank receivership, bank securitization deals would need to meet higher standards for underwriting, disclosure, deal structure, compensation, and risk-retention in order to qualify for sale treatment.  Bair said that the FDIC proposal complements similar reforms underway at the Securities and Exchange Commission and under consideration in Congress.  Bair said she believes that these reforms will help restore confidence in these markets, but in a way that promotes long term, sustainable home ownership.

Finally, educating and protecting the consumer must also be a focus going forward. Somewhere along the line, Bair said, the industry forgot that the ultimate purpose of mortgage finance is not to make a profit but to meet the credit needs of the American people.  There is and should be profit potential, but it must be carried out so it results in sustainable mortgages for consumers.  "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."

It is when consumers don't have a clear understanding of the deal that they are more likely to default as so many who had subprime and nontraditional loans did. Financial education can help consumers make informed financial decisions and protect themselves and this is something the industry can promote through our own outreach efforts.

In recounting the recent history of the banking and housing crisis, the Chairman said that the Community Reinvestment Act (CRA) was not among the causes and that bank regulators are unanimous on that point.   The CRA does encourage banks to make safe and sound loans in the communities they serve but "nowhere does it tell them to make unaffordable, unsustainable loans that set people up for failure.  Most of the subprime and high risk nontraditional mortgages were made by non-CRA lenders.  And these loans were made in large volumes because for a time they were highly profitable and because Wall Street would buy them and securitize them.  It's as simple as that."

Bair said that restoring the system of mortgage finance and securing the economic future cannot be done simply by Washington fiat.  While there are policy challenges to be met and financial regulators have to do a better job identifying and addressing emerging risks, it "takes a commitment by all of us - as homebuyers, market participants and regulators - to build and defend market practices that are designed to withstand adversity, and that protect the long term interests of consumers and the economy."