FDIC: More Attention Must Be Given To Affordable Housing and Borrower Education

Whilernshe stopped just short of the mark, Federal Deposit Insurance CorporationrnChairperson Sheila C. Bair came close to suggesting Monday that the government putrnless emphasis on home ownership in favor of promoting rental housing.</p

This wasrnone of three recommendations for putting the mortgage industry on sounderrnfooting that Bair made in remarks to the HousingrnAssociation of Non-Profit Developers at their Annual Meeting.  Bair said that the industry must also restartrnsecuritization of both conforming and nonconformingrnloans, and do more to educate and protect the consumer.  </p

The Chairperson said that for the last quarter century the federalrngovernment has focused its housing policies on promoting homeownership and thernavailability of credit to homebuyers.  Thernestablishment of government sponsored housing enterprises Freddie Mac andrnFannie Mae and the implied federal guarantee that contributed to their success encouragedrnrisky private securitization which, in turn, fostered the expansion of cheaprncredit to homebuyers. The massive infusion of federal money into keeping thosernenterprises viable over the last two years essentially confirmed those implied guarantees.  </p

The government has also promoted homeownership with tax deductionsrnfor mortgage interest and local property taxes, continuing the mortgagerninterest deductions long after the deductibility of other types of interestrnceased and granting a $250,000 capital gains exclusion on the sale of a home. “In the end,”rnBair said, “these public and private efforts helped to briefly push thernhomeownership rate as high as 69 percent. That's a level that ultimately provedrnunsustainable, and that may not be reached again for many years, if ever.'</p

It should be asked, she said, whether federalrnpolicy is devoting sufficient emphasis to the expansion of quality, affordablernrental housing.  It is estimated that allrnof the tax deductions and exclusions on capital gains add up to taxpayerrnsubsidies for homeowners about three times the size of all rental subsidies andrntax incentives combined. READ MORE ABOUT THE DEARTH OF AFFORDABLE RENTAL HOUSING</p

“In fact,”rnshe said, “you can argue that this huge subsidy for homeowners has helpedrnpush up housing prices over time, making affordability that much more of arnproblem for the very groups you're trying to serve. I think we need a betterrnbalance. Sustainable homeownership is a worthy national goal. But it should notrnbe pursued to excess when there are other, equally worthy solutions that helprnmeet the needs of people for whom homeownership may NOT be the right answer.</p

Bair said thatrnsecuritization and the complex instruments that accompany it have beenrnvilified, and rightly so in many cases, for triggering the recent financialrncrisis.  Mortgage securitization went farrnbeyond the GSEs during the lead up to the latest crisis, with private issuersrndoubling their share of total mortgage debt to more than 20 percent of thernmarket between 2003 and 2006. “This two-trillion-dollar river of credit,rnrunning right through the heart of Wall Street, provided the financing for mostrnof the subprime and nontraditional loans that triggered the crisis.”</p

Butrnsecuritization remains the best way to tap large volumes of capital at thernlowest possible cost.  She said thatrnprivate securitization is, at present, essentially shut down because investorsrnhave lost faith in the process.  A newrnset of transparent practices including higher standards for loan underwritingrnand documentation are needed to restore balance between lenders, underwriters,rnrating agencies, and investors.  Loanrnofficers, she said, must also keep some skin in the game and not be able tornwalk away from the long-term consequences of their decisions.</p

A change inrnaccounting standards has given FDIC what she called a unique opportunity tornlead the way in reforming securitization. rnUnder proposed new rules that govern how the agency handles securitized assetsrnin a failed bank receivership, bank securitization deals would need to meetrnhigher standards for underwriting, disclosure, deal structure, compensation,rnand risk-retention in order to qualify for sale treatment.  Bair said that the FDIC proposal complementsrnsimilar reforms underway at the Securities and Exchange Commission and underrnconsideration in Congress.  Bair said shernbelieves thatrnthese reforms will help restore confidence in these markets, but in a way thatrnpromotes long term, sustainable home ownership.</p

Finally, educatingrnand protecting the consumer must also be a focus going forward. Somewhere alongrnthe line, Bair said, the industry forgot that the ultimate purpose of mortgagernfinance is not to make a profit but to meet the credit needs of the Americanrnpeople.  There is and should be profitrnpotential, but it must be carried out so it results in sustainable mortgagesrnfor consumers.  “But most consumersrnare not Wall Street financial wizards. They want simple mortgage structures andrnstraightforward disclosures that are designed to clarify – not obscure – therntrue nature of the deal.”</p

It is whenrnconsumers don't have a clear understanding of the deal that they are more likelyrnto default as so many who had subprime and nontraditional loans did. Financialrneducation can help consumers make informed financial decisions and protectrnthemselves and this is something the industry can promote through our ownrnoutreach efforts. </p

In recountingrnthe recent history of the banking and housing crisis, the Chairman said thatrnthe Community Reinvestment Act (CRA) was not among the causes and that bankrnregulators are unanimous on that point.  rnThe CRA does encourage banks to make safe and sound loans in therncommunities they serve but “nowhere does it tell them to makernunaffordable, unsustainable loans that set people up for failure.  Most of the subprime and high riskrnnontraditional mortgages were made by non-CRA lenders.  And these loans were made in large volumesrnbecause for a time they were highly profitable and because Wall Street wouldrnbuy them and securitize them.  It's asrnsimple as that.” </p

Bair said that<brestoring the system of mortgage finance and securing the economic futurerncannot be done simply by Washington fiat. rnWhile there are policy challenges to be met and financial regulatorsrnhave to do a better job identifying and addressing emerging risks, it “takesrna commitment by all of us – as homebuyers, market participants and regulators -rnto build and defend market practices that are designed to withstand adversity,rnand that protect the long term interests of consumers and the economy.”

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