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BIPARTISAN GROUP RECOMMENDS HOMEOWNERSHIP POLICY SHIFT AND DIMINISHED GOVERNMENT ROLE After the collapse of the housing market and the hundreds of thousands of foreclosures that came with it, many questioned "the elevated status of homeownership" advanced by the federal government, the Bipartisan Policy Center noted in a recent report. The center's Housing Commission, however, argues it was actually a wide range of factors that converged to create the crisis. A few of the real culprits named in the report include the relaxation of underwriting standards, the emergence of abusive and predatory mortgage products, and activities of unqualified borrowers who submitted false or inadequate credit information. The Consumer Financial Protection Bureau has issued new rules to prevent risky lending practices, but the commission believes the pendulum has already "swung too far from the excesses of the pre-bust era." The commission contends "today's credit box is tighter and more restrictive than underwriting practice and experience justify." With past mistakes in mind, the commission argued in its report that homeownership should be encouraged among those with modest incomes, but it offered up a new formula for ensuring borrower sustainability. The commission recommends the broad availability of prime, fixed-rate mortgage financing and insists on clearly defined terms, limited adjustments, and maximum payment thresholds for adjustable-rate mortgages. To make its point, the commission cited a study from North Carolina's Center for Community Capital that assessed 46,000 low-income homeowners who received traditional 30-year fixed-rate mortgages between 1999 and 2009 through a specific loan program. 30 The study found 95 percent of those homeowners were still making their mortgage payments at the end of the decade, even surviving the housing crisis. The default rate among loans in the study was higher than the rate for prime loans not part of the program, but importantly, it was less than onequarter the default rate of subprime loans, which the borrowers might have otherwise received outside of the special program. The households in the study had a median income of $30,000 and oftentimes put down less than 5 percent on the home purchase price. Overall, the researchers in the study found low-income households with mortgages that were properly serviced and without risky features perform "quite" well. The commission also advised requiring housing counseling for certain situations. "Housing counseling can and should play an important role as a credit enhancer, mitigating the risk of lending to borrowers on the margins of creditworthiness," the commission stated in its report. The commission referenced a study by the Federal Home Loan Banks which examined foreclosure rates among the banks' homeownership programs that require counseling and cater to lower-income and first-time homebuyers. Between 2003 and 2008—1,177 out of 70,163—buyers were in foreclosure, which translates to only 1.7 percent. "Clearly, as indicated by the numbers, homeownership counseling works," the report concluded. The commission also acknowledged the importance of "a strong, vibrant system of housing finance that can ensure a steady flow of mortgage funds to prospective homeowners and those seeking to refinance." The nation's housing finance system cannot currently survive on private capital, so government must to play a continued role, but the commission insists that role must be severely limited. It proposes a new system in which "private capital takes on a larger share of the credit risk." Currently, outstanding mortgage debt is roughly equal to the total assets owned by all U.S. banks. As such, "[f]or the foreseeable future, there is simply not enough capacity on the balance sheets of U.S. banks to allow a reliance on depository institutions as the sole source of liquidity for the mortgage market," the commission noted in its report. Along with an increase in private sector participation, the commission calls for the "elimination, phased out over an appropriate period of time, of Fannie Mae and Freddie Mac." It supports a "continued but limited role for government guaranteed MBS [mortgage-backed securities]" as well as a "continued but more targeted role for the Federal Housing Administration (FHA)." The commission concedes FHA's recent expansion was "appropriate" to meet market challenges but insists FHA should shrink its market share in years to come. Under the commission's plan, Fannie Mae and Freddie Mac would be replaced with a "public guarantor," which would serve to provide a guarantee only after private entities "have exhausted their own capital and reserves." The public guarantor would also serve as a market regulator, ensuring appropriate standards for originators, servicers, and others in the MBS market. The Bipartisan Policy Center's Housing Commission is co-chaired by former Senate Majority Leader George J. Mitchell, former Senator Christopher S. Bond, former Senator and HUD Secretary Mel Martinez, and former HUD Secretary Henry Cisneros. Seventeen other individuals who are widely considered housing and economic experts sit on the commission, including Amherst Securities' Laurie Goodman; Barry Zigas, director of housing policy for the Consumer Federation of America; and Realogy president and CEO Richard Smith. KNOW THIS The U.S. single-family mortgage market is the largest in the world, the Bipartisan Policy Center reports. It's larger than the entire European housing market and nearly six times that of the second largest market, the United Kingdom.

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