Housing Policy After the S&L Crisis
Housing policymakers are influenced by many factors in their efforts to ensure sound and fair rules for government programs. On the federal level, housing policy is shaped by the many individual members elected to Congress, as well as senior members of the administration, particularly those in key posts at HUD. These individuals, like all of us, learn from the experience of history-- both recent and long-past. Undoubtedly, the experience most indelibly imprinted on the minds of housing policymakers in this era will be the S&L crisis and the large sums of precious taxpayers' dollars siphoned off to pay depositors at bankrupt institutions. There are as many views as there are policymakers, as to why so many thrifts failed at such a cost. We asked three individuals who continue to play important roles as housing policymakers how the recent painful memory of the thrift crisis is affecting the shaping of federal housing policy. Their views are their own and merely serve to portray a sampling of the current thinking in Congress and at HUD in the wake of a costly chapter in U.S. history.
All housing policy begins with money, or more specifically, the availability of mortgage financing. Clearly, the 1990s will be a decade of change in financing: higher equity requirements, tighter underwriting and the consolidation of financial institutions. These changes do not necessarily lead to a broad curtailment of the national commitment to affordable housing, however they may offer new opportunities for financing our housing.
An oft-repeated criticism of military strategy is that generals prepare to fight the last war, and thus lose the next one. As Congress, the administration and other policymakers confront and shape changes to finance policy, the specter of the savings and loan disaster of the 1980s should not prevent an orderly consideration of new policies.
Effects from the previous decade
The impressive economic growth of the 1980s expanded opportunities for millions of people in employment, housing and investment. But now the economy is left with the headache of excess decade. The Wall Street Journal reported recently that total debt--governmental, consumer and corporate--increased greatly in the last expansion, to a level higher now (2.4 times the gross national product) than any time since the 1930s. One obvious result of this debt: the many repossessed properties held by the government and private firms.
Meanwhile, the financial services industry is in a period of consolidation and restructuring. The secondary mortgage market continues to expand rapidly, bringing more efficiencies to mortgage finance. Technological changes and an expanding geographic marketplace are challenging banking industry leaders to operate more efficiently. Congress will eventually pass financial institutions restructuring legislation to remove outdated, piecemeal legislation and put U.S. institutions on an equal footing with foreign institutions. These trends point to credit being delivered more efficiently and inexpensively in the future.
But this does not mean the industry will expand the availability of credit without a careful consideration of risk. Both private industry and government policymakers will be looking more carefully at risk assessment with an eye to protecting private and public investments. A proper assessment of risk, however, need not turn into a wholesale withdrawal from the market. Prudent policymakers, just like their private sector counterparts, will identify housing initiatives that expand opportunities while earning decent return. Here are some examples.
Federal Housing Administration
The reform of the Federal Housing Administration's insurance fund is somewhat painful medicine, but a necessary step to halt the slow erosion of the fund; after taking in higher-than-necessary premiums in the 1970s, the fund's costs outstripped its premiums in the 1980s. In addition, home price appreciation of the past two decades is no longer possible. Thus, Congress mandated tighter underwriting standards--hardly a surprise given the current climate. But Congress will have to monitor the situation to ensure that it has not overcompensated for the FHA's recent losses. Sound housing policy mandates that we not shut out any more families from homeownership than is absolutely necessary.
Future changes to FHA should aim to make it a force for "greenlining" neighborhoods, providing credit within neighborhoods that otherwise cannot access mortgage dollars. HUD should examine city codes and FHA requirements to find and remove rules that prohibit new construction of homes on vacant, inner-city lots. The Jack Kemp proposal to establish Housing Opportunity Zones will be revisited, and the FHA could take a leading role.
Fannie Mae and Freddie Mac
As part of the budget deliberations, the Office of Management and Budget and the Department of Treasury proposed that government-sponsored enterprises (GSEs) operate under far stricter standards, such as achieving a AAA rating--absent any government backing--from two credit rating agencies. Critics say the GSEs' ability to borrow at a lower rate than private sector competitors (because investors perceive a federal guarantee) distorts the markets, shifting too much capital to housing at a cost to government measured by the subsidy inherent in the transaction.
The critics would force much higher fees on agencies that could not maintain a AAA rating. It is hard to not attribute part of this trend to the paranoia behind the S&L situation.
In reality, these organizations do not compare to the savings and loan industry of the early 1980s. The organizations have strong capital bases and have no incentive to "gamble" for speculative returns. Furthermore, requiring a AAA rating ignores the fact that they have an explicit public...