The economy has improved, unemployment has fallen, and many people are back on their feet, but the United States’ housing crisis is not over. Unless we want history to repeat itself, we’ll need to continue to reform how banks give out loans and how the government oversees mortgages.
At a recent Urban Institute event called “Housing Policy Past and Future: Lessons Learned Through the Crisis and the Path Forward,” officials from the Obama administration as well as leaders from outside it looked back on the housing crisis and made several observations relative to where we are now. They included that millions of people are still underwater on their mortgages and that taking over two large financial companies in an attempt to stabilize the banking industry has led to an increase in government responsibility for mortgages and risk.
Bankers are pushing for too much risk
One of the topics discussed throughout the event was moral hazard. If the phrase, “too big to fail” comes to mind, that’s because it relates to moral hazard. In the lead up to the crisis, many bankers signed borrowers to risky loans, including subprime loans, which are offered to individuals with higher and adjustable interest rates. When the interest rates on subprime loans went up, homeowners couldn’t pay the monthly payment and started to default.
“The time to worry about moral hazard is not amidst the crisis,” said Jared Bernstein, former chief economist to Vice President Biden. As a reminder, moral hazard is the economic principle that individuals will make riskier decisions if they do not perceive that there will be consequences to them personally. “It’s way before the crisis, when you have a regulatory regime in place so you don’t have to face that moral hazard problem later on.”
Risky mortgages aren’t a thing of the the past, either. Almost immediately after taking office, President Trump
started to said he intended to reverse financial regulations put in place after the crisis as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Recently, he eliminated a rule signed a memorandum that could reverse a rule that requires banks giving retirement counseling to act on their client's’ best interest rather than for self-gain.
Further actions to remove banking regulations could create conditions similar to the ones that existed before the housing crisis, and enable banks to engage in risky behavior once again.
Michael Stegman, former counselor to the Secretary of the US Treasury and former senior adviser to the National Economic Council, said that as Timothy Geithner, the Secretary of the US Treasury during President Obama’s first term, left office, Geithner asked his staffers how they could have improved, with knowledge and hindsight. Staffers and advisors felt that reforming current bankruptcy processes would have helped mitigate moral hazard by advocating for better personal budgeting and changes in consumer behavior so people would have alternatives to declaring bankruptcy.
More education about good and acceptable banking practices may have helped people avoid the predatory lending practices that led to the amount of risk generated by subprime loans.
The housing crisis is not over
Panelists agreed that the housing crisis persists. Depending on which report you go on, Weiss said, 7 million to 12 million homeowners still have underwater mortgages.
“All of us know or have family members who are locked in, in terms of their labor market mobility, their social mobility, their life mobility,” said Antonio Weiss, former counselor to the Secretary of the US Treasury.
Additionally, rental housing faces a crisis of its own. Rick Lazio, a former member of the House of Representatives, said the current system of Section 8 vouchers is also in need of reform, since only 1 out of 4 people get vouchers and others have to be placed on a waiting list.
“There is not a state in America where there is less than 30 percent of renters that are rent-burdened,” Lazio said. “We have about 12 million renters who pay more than 50 percent of their income in rent; it’s increasing.”
Housing is increasingly unaffordable even to many dual-income families, and this issue is not limited to cities. Lazio said while rental housing issues do not get much attention at town hall meetings, members of Congress are becoming more aware of the rental housing crisis, and are looking to address it through alleviating poverty and improving job education.
“Some of the impediments to affordable housing are local zoning laws,” said Michael Bright, Director for the Center for Financial Markets at the Milken Institute. Sarah Rosen Wartell, President of the Urban Institute, said that advocates on different sides often agree that local zoning can affect development, whether it’s to promote development opportunities or to promote inclusionary zoning, and that there’s little the federal government can do about that.
“I do think this is a moral crisis,” Bright said. He said that statistics did not show the extent to which families that are paying a majority of their income in rent are also traveling longer distances for work or spending less time with family.
Shawn Krause, Executive Vice President of Quicken Loans, suggested giving grants to renters as a contribution toward a downpayment for homeownership, and if the home is sold then the grant is repaid and placed back into a fund for another renter to use.
We’re still in desperate need of housing reform
Weiss highlighted several ongoing issues within the current housing finance system. He considers government-sponsored enterprises (GSEs) to be “great unfinished business of financial reform.”
GSEs are government-sponsored financial services firms like Fannie Mae and Freddie Mac, which buy mortgages. The federal government provides a financial guarantee for these mortgages, which helps stabilize the housing finance market.
One step to reforming GSEs would be to take them out of conservatorship, which means they get support from the federal government. Fannie Mae and Freddie Mac have been under conservatorship since 2008. While the companies have paid back the $187.5 billion the federal government originally provided in the form of a bailout and an additional $59.2 billion, some experts warn that if there is another economic downturn that Fannie Mae and Freddie Mac could need another bailout.
Another issue with GSEs is that Fannie Mae and Freddie Mac are mostly serving people with high credit scores, around 750 (out of 850). People who have lower credit scores have more difficulty getting a loan from a conventional bank, and Weiss said that 40 percent of mortgage applications are from people with credit scores under 700.
“It is still the case that for many Americans, many of them are responsible borrowers and would-be renters, there is nowhere to go,” he said.
Weiss said that when he arrived at the US Treasury in 2014 there was “no appetite” in Congress for housing finance reform. Still, the Treasury outlined five principles and lessons learned from programs like the Home Affordable Mortgage Program and the Home Affordable Refinance Program during the last two years of the administration.
Mark Calabria, former director for financial regulation studies at the Cato Institute (and now chief economist to Vice President Mike Pence), talked about the importance of reducing the Federal Housing Administration’s risk in the future, since it carries a large amount of subprime loans. He said that housing prices will go down again, and that the administration’s loans will pose a problem during the next downturn, particularly in California where it has increased its presence significantly. He anticipated that if a downturn strikes, that the administration will need to request further appropriations funding to support itself, just as it did in 2013.
The future of housing policy
“I think we’d all like to move on with our lives,” Bright joked. He hoped that sometime in the future, they could meet for another panel and discuss the best ways to implement new policies, rather than continue to discuss which policies are better.
Bright said that since 2010, there has been a big increase in education among Congress, and there is now more appetite to take on housing finance reform, but the next administration will need a Secretary of the Treasury who can communicate what reform will do to help homeowners and renters.
Krause was not optimistic about GSE reform being a priority for the Trump administration, but other kinds of housing reform might be feasible. She encouraged policymakers to take a much deeper look at housing finance reform and understand the scope of the programs and agencies before deciding on the next steps for reform.
This article is the second in a two-part series about the experiences of leaders and economists who had a front-row seat for the housing crisis. The first article covers what top-ranking officials remember about the housing crisis when it happened.
Correction: The original version of this post said that President Trump had started rolling back financial regulations and that he had eliminated a rule requiring banks giving retirement counseling to act in their clients' best interest. He has only said he intended to roll back the regulations, and he has only signed a memo that could lead to the reversal of the banking rule.