U.S. Should Take a Page Out of Canada's Housing Playbook
Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan didn't invite me to the "Future of Housing Finance" conference they co-hosted in Washington earlier this week, but that didn't stop me from trying to come up with a fix for our broken housing finance system. As usual, I tried to reduce the problem to a riddle:
"There are two nearly identical adjacent houses-one to the north and one to the south. They are each wood-framed 3 bedroom 2 and ½ bath homes built in 1995 on half acre plots. The northern house has always been and now is financed by a private sector mortgage bearing no government subsidies or guaranties; the one to the south always has been and now is financed by a government subsidized and guaranteed mortgage. What separates the two houses?"
The answer: "The US-Canada border."
Though nearly all the "experts" who spoke at Tuesday's conference said that the US had to continue supporting housing finance-that it would be impossible to finance housing through the private sector-our neighbor to north, Canada, has somehow always managed to finance its entire housing stock through private banks. And somehow Canada's still got a higher homeownership rate than we do-68 to our 66 percent. More important, only .44% of Canada's mortgage borrowers are 3 months behind compared to 9.5% in the US. That means US homeowners are defaulting over 21 times more frequently than their Canadian counterparts!
How is it that Canadians have managed to get their houses financed by private banks without taxpayer guaranties and bailouts, but we can't? And why is it that our housing market crashed and is still struggling while theirs is healthy? After all, our GDP is about 10 times Canada's. What's Canada got that we don't?
Stumped? So was I. The only thing I could figure Canada had over on us in the real estate finance department was Mort Zuckerman, and he moved here years ago.
Then it struck me. Maybe the question needs to be asked the other way ‘round-what've we got that Canada doesn't?
Unlike our neighbors to the north, we've got champions of the affordable housing mandate-an enlightened liberal elite including Jimmy Carter, Bill Clinton, Janet Reno, Barney Frank, Chris Dodd and Maxine Waters.
And so I thought-why not export our affordable housing mandate to those unfortunate nations that have not yet seen the light?
We could form an elite task force of "Affordable Housing Advocates"-the AHA group-and embed them within the beneficiary-nation's political system for a ten year period, all at our sole expense of course. By the end of their tour of duty, the AHA task force would have successfully ingrained their sacred principles in the laws and financial system of the beneficiary-nation and could return as heroes to the US.
The first beneficiary would be Canada. We would send Jimmy, Bill, Janet, Barney, Chris and Maxine up north for their ten-year tour.
While they were gone, we would shamelessly copy the Canadian system here in the US:
· We would gradually wind down Fannie and Freddie and return housing finance to the private sector. There's no equivalent to Fannie and Freddie in Canada.
· We would gradually phase-in a 20 percent down payment requirement-that's what they have in Canada.
· When we hit the 20 percent down payment requirement, we would return FHA mortgage insurance to its historical market share-insuring 1 in 30 rather than 1 in 3 mortgages.
· We would gradually eliminate the 30-year fixed rate mortgage. It sounds like a good idea, but all it does is shift the interest-rate risk to the lender, and given our new too-big-to-fail rules, we can't afford this engine of systemic risk. We could gradually reduce the fixed-rate periods until they are down to 5 years. That's what they have in Canada.
· We would gradually phase-out the tax deduction for home mortgage interest. They don't have that in Canada. It encourages people to take on more mortgage debt than they can handle. Of course, at the same time, we would lower marginal rates across the board to make the elimination of the deduction revenue-neutral.
· Most important, we would eliminate the affordable housing mandate. From now on, all loans would get underwritten on a color-blind, not a socially engineered basis. If you don't have the down payment, or don't qualify according to objective underwriting criteria consistently applied to all applicants, you don't get a loan. That's how mortgage underwriting works in Canada.
In all seriousness, we shouldn't let anyone from HUD Secretary Shaun Donovan to Pimco Chief Bill Gross, tell us our housing markets can't be financed by private banks without them carrying the burden of explaining what's different about Canada-why Canada's homes can be privately financed but ours can't. Messrs. Donovan and Gross may have different agendas but they both want an explicit U.S. guarantee on home loans-Mr. Donovan is hellbent on continuing the democratization of credit no matter what the costs while Mr. Gross would love nothing better than to continue being able to purchase U.S. guaranteed mortgage backed securities.