The Democratic Party's presumptive presidential nominee has her work cut out for her. Hillary Clinton declared in her first substantive speech in New York recently that she would make narrowing the nation's wealth gap a top priority. But she failed to mention that the current presidential administration has made real progress difficult for her or anyone who next occupies the White House.
This is a marked departure from the administrations of Presidents Bill Clinton and George W. Bush, both of whom knew that homeownership is one of the most effective means for Americans to accumulate wealth — particularly for low-to-moderate income families. Studies showing the economic and societal benefits of homeownership have not changed in the years since they left office. Yet throughout the presidency of Barack Obama, the homeownership rate has fallen steadily and now stands at its lowest point since 1967. More troubling still, a recent report from the Urban Institute predicts that this trend will continue for another 15 years and that the decline will be experienced disproportionately by African American families. As more and more Americans write rent checks instead of gradually paying off their mortgages, the wealth gap will continue to widen.
How did the hard-fought gains in homeownership slip away? Ironically, much of the blame can be laid on many of the policies meant to protect borrowers in the aftermath of the housing crisis. These policies were intended to prevent Americans from getting loans they can't afford to repay and to rein in lenders who were too aggressive in extending credit. But policymakers failed to anticipate harmful consequences of these regulations.
The changes implemented under the Dodd-Frank Act include the creation of the Consumer Financial Protection Bureau and the introduction of "qualified mortgages" and complicated formulas that lenders must use to determine borrowers' ability to repay. The Department of Housing and Urban Development's inspector general has teamed up with the Justice Department to use a 150-year-old statute called the False Claims Act, never before applied to mortgage lenders, to extract billions of dollars in settlements from those who make loans insured by the Federal Housing Administration. Many large lenders have backed away from FHA-insured loans, which are targeted at first-time homeowners and lower-income borrowers. FHA lending on single family homes has plummeted since 2009.
The result is a "zero-defect" lending environment, wherein lenders agonize over each loan and appear willing to make only the safest loans to borrowers who have pristine credit histories. In our zeal to protect consumers, we have deprived many of them of one of their best chances to climb the economic ladder.
So what can the presidential candidates of 2016 propose to right the course? The answer is not easy or self-evident. American voters have vivid memories of last decade's burst real estate bubble, which resulted in waves of foreclosures and the removal of over $180 billion from the public coffers to keep Fannie Mae and Freddie Mac afloat. The nation has no interest in repeating this recent history.
But there are alternatives. Recent events suggest that private capital stands ready to take on credit risk in the mortgage markets. For instance, new entrants into the mortgage insurance industry, such as Essent Guaranty and National Mortgage Insurance, have been able to raise significant amounts of capital. In addition, according to the U.S. Mortgage Insurers Association, established players in the private mortgage insurance industry have raised about $9 billion in new capital since 2007.
Just as telling is the robust demand for credit risk recently packaged and sold by the government-sponsored enterprises. For the past several years, Fannie and Freddie have been required by the Federal Housing Finance Agency to sell to private capital sources significant slices of the credit risk associated with their mortgage portfolios. Each has now created new forms of securities that tie the bond's return to the actual credit losses incurred on specific pools of underlying residential mortgages. Recent offerings of these securities have been oversubscribed, and, as a result, the prices bid on the securities have risen.
What is the conclusion to be drawn from all of these transactions? Private capital hasn't given up on the mortgage markets. It just needs to find ways to earn reasonable returns for assuming the risks.
The next president can pursue a few simple policies to encourage private capital sources to invest directly in residential mortgages. First, and foremost, a new administration should focus on bringing certainty back to the mortgage process. For example, a common complaint of lenders is that the CFPB is reluctant to commit its guidance to writing, relying instead on the publication of results of enforcement actions as evidence of their intent. Mortgage lenders who have survived to this point are willing to play by the rules, but they need to know what the rules are.
The next administration should also make a fresh assessment of the utility of the new regulatory framework. Do the new "zero defect" environment and the practice of "regulation through enforcement" really benefit consumers? The data suggest that those who have fallen behind on their mortgages may have realized some advantage from new CFPB rules that prolong the foreclosure process and provide layers of protection to delinquent borrowers. However, new borrowers are paying higher rates for a more limited range of mortgages after undergoing a dramatically longer and more difficult lending process. The net result: fewer homeowners.
Most importantly, candidates in the next presidential race should support building a system that will give any family that has a reasonable chance of sustaining homeownership a chance to pursue that course. By definition, such a system will result in some defaults. But if the losses are predominantly sustained by private capital and if the lender is able to price the loan according to the risk it assumes, more loans will be made. The net result will be a rise in homeownership levels. The nation will be the better for it.