How Can We Fix the Housing Finance System?

In an important article in The Wall Street Journal this week, Edward Pinto, a former Fannie Mae executive, discusses the underlying problems that caused the problems with the housing finance system and potential solutions.  For example, some people are suggesting an explicit Federal guarantee of mortgage-backed securities (MBS), a tax on MBS to fund low-income housing, and more affordable housing mandates.  Can we expect that these current suggestions will work?  If not, how can we fix the housing finance system?  Let’s talk about it now.

Affordable housing mandates for starters can’t be expected to work and certainly, it is very unlikely that they will help fix the system.  Why?  The Federal Housing Enterprise Financial Safety and Soundness Act tried that in the 1990’s.  It required affordable housing mandates.  This law, along with additional Federal housing policies, resulted in the wholesale relaxation of sensible, prudent, and safe lending practices.  The ability to repay a mortgage, good credit, and reasonable down payments were no longer policies lenders routinely followed in all cases.  In fact, affordable housing mandates were a major factor in creating the recent financial crisis.  Why should we try something that was an obvious and recent failure for the nation?  Do we want to set ourselves up for another financial crisis?

The idea of another new tax, this time on MBS, makes little sense either.  Increasing taxes will just be another barrier to re-starting a robust housing market.

Finally, the concept of Federal guarantees is not a new concept either.  That’s what we witnessed the last few years.  How well has that worked?

Rather than pursuing the failed policies of the 1990’s and recent years, let’s get back to some common sense basics.  Let’s give out mortgages to people who have good credit, who have the income to make their mortgage payments, and who have a down payment to put toward the purchase price of the home.

How do we help the poor who need help with their housing?  Use regular tax receipts and utilize normal welfare channels.  But, don’t have big government destroy the entire housing market in order to attempt to help the relatively few, truly needy people.