A framework for housing finance reform.

Author:Heid, Michael J.
Position:Executive Suite
 
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With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the government must now turn its attention to the cornerstone of any housing policy-the creation of a reliable and sustainable system of mortgage financing. As acknowledged by the Treasury Department and mortgage industry participants, this additional legislation is essential to the availability of credit to home-owning American families and the safety and security of the American economy as a whole for decades to come.

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Securitizing mortgages is essential to economic health

Recent experience across the globe has shown that housing values are intrinsically linked to household wealth, consumption patterns and the strength of the overall economy.

While a stock market crash typically results in a larger decline in asset values, declining housing prices generally will have a deeper and more prolonged effect on the broader economy.

Too much credit-through relaxed underwriting standards or poorly designed mortgage products-can trigger an unsustainable housing boom that leads to destruction of housing values. Too little credit can produce or exaggerate a decline in home values, with the same ultimate result.

A reliable, secondary market source of funding is necessary to ensure that homeownership is both achievable and sustainable for customers who are credit-ready, have the ability to repay their loans and ultimately will benefit from homeownership. It's equally as critical to provide stable and reliable funding for multifamily properties, which are a major source of affordable housing in our country.

The country's housing finance needs cannot be supported through deposits alone. In 2009, residential mortgage debt outstanding totaled $11.9 trillion-almost 60 percent more than the total deposits held by commercial banks ($7.5 trillion). To support the mortgage market, lenders need access to the broader capital market. The option of securitizing mortgages is particularly important for community banks and smaller lenders, which have less access to alternative funding sources, including covered bonds.

Solution to housing funding is complex

The issues to be addressed in defining how to create a sustainable source of housing funding are definitely complex, but not insurmountable. They require thoughtful and practical, yet comprehensive, solutions that strike the delicate balance of sorting through competing policy objectives and differing opinions...

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