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Daniel Gorfine
Adjunct Fellow; Vice President, External Affairs and Associate General Counsel, OnDeck
Capital Access and Capital Markets and Demographics and FinTech and Global Economy and Public Policy
Daniel Gorfine is an adjunct fellow at the Milken Institute and vice president, external affairs and associate general counsel at OnDeck, a technology-based company focused on transforming small business lending.
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MI-GU Hill briefing: Repairing the U.S. housing market: The future of the mortgage finance system
By: Daniel Gorfine
May 14, 2012
   
   
The Milken Institute's Center for Financial Markets and Georgetown University's Center for Financial Markets and Policy at the McDonough School of Business recently hosted the latest in their joint Capitol Hill briefing series, focusing on repairing the U.S. housing market and the mortgage finance system. Speakers included Steven Abrahams, managing director and head of MBS and Securitization Research at Deutsche Bank; James R. Barth, Senior Finance Fellow at the Milken Institute and Lowder Eminent Scholar in Finance at Auburn University; Phillip L. Swagel, Senior Fellow at the Milken Institute and professor at the University of Maryland School of Public Policy; and Glenn Yago, Institute Senior Research Fellow. Brian Gill, adjunct professor of real estate at Georgetown UniversityaEUR(TM)s McDonough School of Business, moderated the panel.

The speakers discussed the effects of the financial crisis and the current state of the housing and mortgage finance markets, as well as suggested policy prescriptions to help resolve the foreclosure problem and encourage greater participation of private capital.

Some noteworthy takeaways:

• The panelists agreed that we are far from a robust recovery in the housing market, although there are signs that we are at or near a bottom. On the downside, there has been a 40% nominal decline in home values, and there is still an overhang of nearly $1 trillion worth of homes either in foreclosure or in the foreclosure pipeline. On the other hand, housing starts -- an indicator of the sectoraEUR(TM)s health -- have been steadily increasing, though are still below their pre-crisis levels.

• The panelists shared concern that one consequence of the governmentaEUR(TM)s response to the financial crisis is that Fannie Mae, Freddie Mac, or the Federal Housing Finance Agency now guarantee or own more than 90% of all new mortgages. This is leading to further market distortions, and greater private capital participation is necessary to restore proper market function. Increasing the guarantee fees that Fannie and Freddie charge lenders to reduce their comparative pricing advantage over the private sector would help attract private capital. The panelists also proposed that FHFA assume private sector participants' first loss positions and unify securities created by Fannie and Freddie to reduce investment costs to private actors.

• The panelists discussed potential ways to mitigate the negative impact of foreclosures on families and real estate prices. Banks currently have a maximum of five years to resell homes after foreclosing on them, and this limits their management options. If policymakers extend this time limit, more banks may be willing to rent these homes back to the occupants, thereby preventing dislocations and further downward pressure on neighborhood home prices. Bank of America recently implemented a trial program along these lines, allowing families in foreclosed homes to remain in these homes for three years, renting them at a market rate.

• Another policy option discussed for reducing the number of properties on the brink of foreclosure is a program of principal writedowns. However, some of the panelists were skeptical that this would have any noticeable effect on the market because of the relatively small number of families that would benefit from such a program. There are around 11 million underwater homes, only 600,000 of which are delinquent. About 90% of those 600,000 occupants haven't made a payment in six months or more and are not likely to be able to afford to stay in their homes even with a reasonable amount of principal reduction. One panelist concluded that a program of principal write-downs would therefore provide minimal benefit to the housing market relative to its cost.

• The panelists also gave suggestions for ways to restart the housing market. One panelist thought that the federal government should standardize the Mortgage Electronic Registration Systems (MERS), speed up the foreclosure process to decrease the backlog in the system, and move forward with GSE reform. Another panelist suggested recapitalizing the banking system in order to increase lending.