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Top Five Questions Treasury Officials Need to Ask About the Housing Market

When federal officials, bankers, and economists meet on Tuesday to talk about the future of the mortgage market, they need to ask bigger questions about what it means to own a home.

Foreclosed homes

A bank-foreclosure sale sign is posted in front of town homes in Los Angeles. (Kevork Djansezian / Getty Images)

The federal government needs an exit from the housing market, even as it tries to also tackle long-term unemployment, financial reform, and growing fears of deflation.

The sale of new homes has lagged since April, when the first-time home buyer’s tax credit expired. Now taxpayers are on the hook for $148 billion for propping up Fannie Mae and Freddie Mac, the for-profit mortgage companies the federal government took over in September 2008, and, according to new data from ProPublica, only 30 percent of the 1.3 million homeowners who applied for mortgage modifications to stave off foreclosure have received them, thanks to service problems and bureaucracy. “The government is sitting at the Texas Hold 'Em tables, and they’ve gone all in,” says Karl Case, a housing economist and cofounder of the S&P/Case-Shiller Home Price Index.

Can the government worm its way out of this mess? A group of Treasury officials, economists, mortgage-company executives, and bankers will gather in Washington on Tuesday to talk about the ways they can tackle the big policy questions surrounding housing finance. NEWSWEEK informally polled a few economists and academics to pinpoint the five basic questions the group needs to ask.

1. How involved should the government really be in the housing market?

Between Fannie Mae, Freddie Mac, and the Federal Housing Authority, the federal government now controls about 90 percent of the U.S. mortgage market. Even the most vocal big-government proponent agrees that’s too large a share. The government intervened in Freddie Mac and Fannie Mae because, as private entities, they failed. But in the long run, what should these mortgage companies look like? Should they be private entities run like utility companies with the government providing catastrophic insurance? That's what Tom Lawler, former chief economist of Fannie Mae, asks. Should the government ensure the mortgage-backed security rather than the mortgage itself? That question is from Laurie Goodman, an Amherst Securities Group analyst. And if the government is so involved in the housing market and may be for the next two to three years, shouldn’t it be careful about regulating it and who it lends money to?

2. What should be required of people if they’re going to buy a house?

This is a great time to buy a house, provided you’re employed, have great credit, and are willing to make a nice down payment. “The No. 1 question now is whether people are willing to go through the full monty in terms of disclosing assets to get a mortgage,” says Lawler. But those who are willing to submit to increased scrutiny can receive a 30-year mortgage at an interest rate as low as 4 percent. So, while the home buyer with poor credit, a small income, or no down payment may be out of luck, the more conservative home buyer with savings and an income proportional to the mortgage debt is in luck. Is this what we want the requirements to look like moving forward, and how will we regulate them?

3. Should the government put a limit on the size of the mortgage it’s willing to insure?

The government is on the hook for 90 percent of the mortgages in this country, including loans of up to $750,000 that the Federal Housing Administration insures. "It's hard to say that's a program for low-income to moderate-income people," says Dean Baker, codirector of the Center for Economic and Policy Research. Is there a way for the government to cap its insurance on mortgages—similar to the way the FDIC caps the amount of bank deposits it's willing to insure?

4. What should the future of homeownership look like?

One of President George W. Bush’s legacies was the “homeownership” society that encouraged Americans to purchase homes. That same vision may look much different in the future, if the government regulates the mortgage market more closely or proposes stronger lending requirements. Will everyone feel compelled to own a home as part of the American Dream? Will homeownership become something that only upper-middle-class families can afford, particularly in major metropolitan areas? Or will homeownership lose some of its luster, thanks to the foreclosure crisis, or to the fact that homes are now worth less than their purchase price? Will renting seem more attractive, since it also provides people with mobility—the chance to relocate for work or other personal matters?

5. Finally, do housing conferences accomplish anything?

The Obama administration sponsored a jobs summit, similar to this housing conference, in November 2009, which was largely mocked for its uselessness. It too gathered together prominent thinkers and business leaders to mull job creation. Months later, the national employment rate still stands at 9.5 percent. Is it even worthwhile to talk about the ways the government can and should extricate itself from the housing market when the economy remains so fragile and that possibility is a few years off? “Nothing will happen on reform for years,” Goodman says. “The conference is a big blah, blah, blah.”

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