Obama Makes Housing An Entitlement, Not An Opportunity
President Obama forcefully argued for "no bailouts, no handouts, and no copouts" in his State of the Union Speech in January, but it's hard to take those words seriously after examining his housing and homeownership policies over the last three years. In fact, the White House is well on its way to orchestrating a very large middle class bailout as it transitions its federal housing policy from one that strives to create housing opportunities, to one that establishes homeownership as an entitlement.
This policy shift became much clearer this month when the Obama administration announced directives to lower financing fees at the Federal Housing Administration (FHA) and Veteran's Administration (VA). The fees will make it even easier for households to secure home mortgages, but will separate loan approval decisions from estimates of borrower risk. Since FHA is already dangerously close to becoming insolvent (it is currently leveraged higher than Lehman Brothers was when it declared bankruptcy), this puts taxpayers at a greater risk of having to offer another bailout down the road.
At first glance these efforts are little more than political pandering to targeted interest groups. Yet they are another salvo in the Obama administration's efforts to insulate the middle class from the vagaries of the housing market. Current housing policy is not directed at restitution for bad behavior, enforcing laws, or even providing balance in the market. Rather, the Administration's efforts are focused on becoming a political advocate for homeowners and consumers.
Prior to the housing bust, federal policy focused primarily on creating a stable financial environment that facilitated private sector financing of privately purchased and sold homes. While some agencies, most notably the FHA and Ginnie Mae, provided direct assistance or guaranteed federal mortgages, the real players were Fannie Mae and Freddie Mac. These two giant government-sponsored enterprises (GSEs) effectively created a national mortgage market, greatly reducing the cost of housing finance in the process. A key role for these players was in matching private investors to mortgages through their role as a guarantor.
This relationship began to sour when federal policymakers decided to push the envelope on housing finance, beginning in the 1990s. Under the guise of the "opportunity society," a bipartisan effort pushed the housing finance system beyond sustainable levels by keeping interest rates artificially low and facilitating the growth of subprime and near-prime mortgages to goose the homeownership rate. These nonconventional prime mortgages accounted for almost 40 percent of all mortgage originations in 2006 according to the Government Accountability Office. Fannie Mae and Freddie Mac had hundreds of billions of dollars in their portfolios.
Federal policymakers could have restored the old system (which worked well by almost all accounts until the 1990s) when the financial system collapsed, but instead moved in a new direction. Rather than continue the federal role in largely facilitating a national network of housing finance, the George W. Bush and Obama administrations began refocusing federal efforts on managing the housing market more generally to the benefit of homeowners, dramatically reducing opportunities for private financial institutions. Federal policy is incrementally and gradually refocusing homeownership as a middle class entitlement, not as a market facilitator for willing buyers and sellers.
Thus, it's not surprising that more than three quarters of the $26 billion so-called robo-signing "settlement" finalized in February is going toward mortgage refinancing and principal reductions. As my Reason Foundation colleague Anthony Randazzo has noted, just 6 percent of the settlement is going to a fund restitution or compensation to homeowners potentially subjected to robo-signing. Financial relief can be provided to anyone going through the foreclosure process between 2008 and 2011 regardless of whether their mortgage was subject to actual robo-signing. The vast majority of foreclosures caught up in the mess were legal and appropriate based on standard foreclosure criteria according to the independent U.S. Government Accountability Office.
It's easy to get side-tracked by the political rhetoric of no more bailouts, handouts, red tape or "runaround from the banks" in an election year. The common sense tone of Obama's State of the Union speech and White House press release announcing the FHA and VA financing directives cleverly obscure a subtle but significant shift in housing policy with dramatic repercussions for how the housing market will function in the future.
The Obama administration believes that household investments in housing, unlike stocks or other equities, should not be subject to market fluctuations. Households are not viewed as rational buyers weighing the relative risks and rewards of homeownership; they are passive players simply in the wrong place at the wrong time. So, the government's role is to step in and make sure they stay in those homes that they paid too much for even when they have jobs and income that can't support the payments.
This is not a trivial shift in policy. By redirecting housing policy to propping up homeowners simply because the value of their investments fell below expectations, the Obama administration is furthering the transformation of homeownership into a federally guaranteed entitlement. The result will be a much less dynamic and market-driven housing sector over the long run, making the kinds of adjustments necessary to recalibrate housing supply and demand much more difficult and sluggish in the future.