April 18, 2012
Business Roundtable Position on U.S. Housing Policy: Principles for Reform
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The health of the U.S. housing market has always been, and will continue to be, critical to U.S. economic growth and success. There can be little doubt that recoveries in the housing market and overall U.S. economy are inherently linked. The direct and indirect impacts on consumer assets and spending, local communities and employment, and businesses of all types and sizes are well documented.
Today, the data tells the story: homes prices are about one-third below their level of six years ago; household wealth and consumer confidence have been impaired; housing starts are running at near-record lows at roughly one-third of their normal level; and the unemployment rate for construction workers (approximately 16 percent) is a key reason the national unemployment rate remains at historically high levels.
The housing market accounts for 15 percent of the nation’s gross domestic product (GDP). For every new house built in the United States, three new full-time jobs are created. The sooner U.S. housing starts return to the historical average of 1.2 million per year, the sooner we realize the creation of 1.5 million new full-time jobs in construction, manufacturing, and related supply chains.
The CEOs of the Business Roundtable believe we must take action immediately to accelerate and sustain the U.S. housing market. To achieve this, comprehensive policy reforms that are both impactful and immediate in their implementation are essential.
The following principles should guide reforms to ensure that creditworthy borrowers have access to mortgage credit in all market conditions, and to support the housing market and overall U.S. economy.
Principle One: Facilitate the Private Mortgage Market
Encourage private lending and investment
Supporting the needs of borrowers and an overall $11 trillion real estate market requires a liquid and stable secondary mortgage market that is fueled by private lending and investment. Since the crisis, private sector capital has effectively disappeared and the government remains the dominant source of mortgage financing.
Moving forward, a sound U.S. housing policy should leverage the market discipline and incentives associated with private capital. Government policy should be designed to ensure long-term stability and to encourage investment in housing finance by pension funds, mutual funds, endowments, and other potential sources of capital. Borrowers, taxpayers and all housing stakeholders will benefit from a sound and vibrant private market.
Enhance standardization and transparency in the mortgage finance market
Improved standardization and transparency related to underwriting, disclosure and overall risk-taking are critical components of well-functioning mortgage and housing markets. Such features provide certainty and confidence for all market participants, including investors, who provide capital for lending, and borrowers, who need clear information about their rights and responsibilities as homeowners.
Coordinate government action to provide stability and certainty
Broad-based uncertainty remains a significant impediment to a robust U.S. housing market. Uncertainty relating to rules, regulations and government initiatives (e.g., temporary rules relating to housing recovery measures, additional regulatory mandates, speculation about GSE reform, etc.) affects private sector participation in the housing financing market, which ultimately impacts all housing stakeholders including current and prospective homeowners and borrowers.
Significantly, the impact of certain legislative and regulatory actions (including accounting changes and regulatory mandates under Dodd-Frank, new capital requirements under Basel, etc.), as well as legal uncertainty for market participants, greatly hinder a recovery in the mortgage and housing markets. A sound U.S. housing and tax policy should establish a long-term, stable and predictable regulatory environment that instills confidence in all stakeholders, including homeowners, lenders and investors
Ensure consistent regulatory oversight and examination to support extension of credit
The availability of credit to creditworthy borrowers is critical to a housing recovery and thus a stronger U.S. economy. Sound underwriting is a cornerstone of a sustainable housing marketplace, but bank regulators, through excessively rigid rules and regulations, are strongly discouraging mortgage lending. Guidance needs to come from the top down that the present mindset of bank regulators is undermining a robust housing recovery. Regulators need to signal that the current attitude of “don’t make mortgage loans – they might be risky” should shift to “America’s housing markets are stabilizing and mortgage lending, if done prudently and to creditworthy borrowers, can be a safe and profitable business.” One necessary step is to recognize the varying degrees of risk in a diverse pool of applicants in underwriting standards, which will result in consistency and transparency in bank examinations.
Regulators must promote standards for appraisals, verification of income, etc. to facilitate the mortgage application process. They should also work to reduce unnecessary bureaucratic hurdles that clog the application and underwriting process, beginning with duplicative State and Federal processes that seek to achieve a common objective but generate twice the work.
Principle Two: Reform the Government-Sponsored Enterprises (GSEs)
Reduce taxpayer risk and encourage market-based pricing
While the public sector’s role in the housing market has provided benefits for some homeowners, it has also created distortions impacting the competitive playing field between public and private entities in the mortgage financing market.
Today, the government-sponsored enterprises (GSEs) are in conservatorship, and the government plays a role in more than 90 percent of all mortgage lending. It is important that housing policy support the transition to a sound and vibrant private mortgage market that minimizes taxpayer risk and appropriately recognizes any such risk that remains.
Reform must include short-term reassessment of guarantee fees and movement toward market-based pricing.
Reduce the GSEs’ Portfolios
The restoration of certainty in the U.S. housing market will require the portfolios of the GSEs to be reduced. This must be done carefully and gradually over time. All segments of the housing market suffered because the GSEs held outsized portfolios that crippled them when the market imploded and the value of mortgage-related debt and assets collapsed. Regardless of whether the U.S. housing market requires government support in the short term, long term, or only in times of stress, any successor(s) should transition away from holding a portfolio.
Refocus the Nation’s affordable housing strategy
The idea of separating social policy and housing finance has been the subject of discussion for many decades. The financial crisis has made resolving this debate an urgent matter. A sustainable, transparent housing finance system must have clear rules and incentives, and policy goals that are obtainable through straightforward mechanisms that don’t introduce risk or distortions to the system. Successful GSE reform must establish clear rules about how best to achieve policy goals related to affordable housing and homeownership levels.
Evaluate limited-term innovative initiatives to support a housing market recovery
Regulators should work with stakeholders to adopt market-driven approaches for dealing with real estate owned properties (REO properties) and abandoned homes. Given the size and scale of the excess supply of homes, particularly those held by the GSEs, the Federal Housing Administration (FHA) and investors, residential property values will continue to be depressed, local communities will continue to be destabilized, and the housing recovery will be forestalled if action is not taken. At the same time, and to avoid further instability in the housing market, the Home Affordable Refinance Program (HARP) and other government refinance programs should be designed, implemented and managed in a manner consistent with the needs of a healthy private mortgage market.
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The benefits of homeownership to the U.S. economy are time tested and, in many ways, incalculable. Great care and caution must be exercised by policy makers and regulators in addressing the near-term recovery and the critical long-term stability of housing. Tax policies and regulations should preserve the benefits of homeownership and serve to continue the historical linkage between a strong housing market and a strong U.S. economy.