Housing reform is the third rail of US politics
The incoming presidential administration has made headlines for its proclamations of wide ranging political and economic reforms, but it's also becoming clear that the new president may not be any more willing than his predecessors to tackle one of the most contentious policy issues in the capitol — the reform of the US housing and mortgage finance industry.
President-elect Donald Trump has uttered no clear policy position on housing, either during his campaign or since he won the presidency. The most substantive moves he has made on housing have been through his appointments.
Ben Carson, a former child neurosurgeon and onetime Republican presidential hopeful has been nominated to lead the Department of Housing and Urban Development, one of the primary US housing regulators, while former banker and ex-Freddie Mac executive, Timothy Bitsberger, has been named to the administration’s landing team at the Federal Housing Finance Agency (FHFA).
Trump’s nominee for Treasury Secretary, Steve Mnuchin, has spoken publicly about privatising the government sponsored enterprises, ending the government sweep of their profits and bringing them out of conservatorship. The prospect of so-called “recap and release” has boosted shares of Fannie Mae and Freddie Mac since the election.
However, that eventuality could be a long way off, given the role both Fannie and Freddie play in the mortgage market, a role that has only grown since the crisis.
While having a government-controlled duopoly might not be philosophically palatable for private market advocates, the certainty that originators get from being able to sell mortgages to Fannie and Freddie has become the bedrock of US mortgage finance.
In fact both GSEs are making efforts to further integrate themselves into the primary lending market by producing software that will allow originators to see immediately whether the mortgages they originate are GSE-compatible.
When Trump takes office in January, he will find a housing market that is dependent on the status quo. He will also find that there is no political consensus in Congress around any single solution that would change how mortgage finance works in the US.
Even if a measure to alter the status quo was proposed, the 48 seats which the Democrats hold in the Senate means that any legislation would need bipartisan support. At the time of writing there appears to be no proposal on the horizon that could get 60 votes in the Senate.
The problem of GSE reform might seem less pressing compared to the issues that Carson will face at HUD if he is confirmed by the Senate.
First time home buyers remain largely absent from the market, new supply is tightening and affordable housing is out of the reach of many Americans.
Carson must find a way to not only encourage home builders to construct more affordable homes but also then marshal the programmes that help low income buyers get access to homes.
Carson will also have to determine agency lending guidelines, as well as take responsibility for the activities of Ginnie Mae, which packages HUD loans into MBS.
Trump’s lack of any discernible housing policy and his pick of Carson, who has little relevant experience, seems to demonstrate that the administration has no clear plan when it comes to housing.
The thinking in Washington among mortgage observers is that despite the bold talk, the new administration may well opt for the status quo.
The US housing and mortgage finance market’s post-crisis recovery is supported by a delicate web of public and private financing. Any attempt to fundamentally alter the structure of the market could reverse that recovery, especially as interest rates rise and mortgages becomes more expensive.
A detailed and comprehensive plan to replace the status quo is needed before Trump and Republicans in Congress can even dream of touching the highly dangerous third rail of housing reform, and it appears that no such plan exists among Republicans or Democrats.