With viable strategies to revive the housing market in increasingly short supply, ideas that generate more than a dismissive nod have a way of surfacing quickly in news feeds. On Wednesday, for example, Bill Gross, co-founder of bond-fund powerhouse Pacific Investment Management Company, suggested to CNBC that Fannie Mae and Freddie Mac, still the biggest players in the secondary mortgage market, should lower their down payment requirements to further boost home affordability.
Gross points to the plummet in existing-home sales for July as evidence that even though mortgage rates are at record lows, they haven’t lured significant numbers of buyers to the closing table. The next logical step, he argues, is to lower down payment requirements.
“To the extent that you can finance a 3.5 to 4 percent (mortgage) with a 20- or 25-percent down payment, most … households can’t come up with the money,” Gross told CNBC. “So there needs to be some type of cautionary reduction in terms of down payments.”
Will home finance reform diminish homebuyer subsidies?
While Fannie and Freddie could conceivably come under government pressure to address down payment requirements, another set of housing-finance issues is percolating in Washington, D.C. The National Association of Home Builders’ third vice chairman, Rick Judson, recently reported on proposals floated during the Conference on the Future of Housing Finance, which convened August 17 to discuss federal government support of housing finance.
Judson noted in an NAHB press release that some parties at the conference said housing has been subsidized by the government to an extent that has too severely compromised help for other sectors of the economy. He added that some participants also proposed redirecting housing subsidies – such as the mortgage interest deduction and other homeownership tax benefits – from homeownership to rental housing, and from higher-income to low-income beneficiaries.
“NAHB will need to marshal statistics and other research,” he said, “to counter these attacks, which were not well supported factually during the conference discussions.”
Judson was much more optimistic about the panel’s consensus on the need for explicit, rather than implicit, loan guarantees through Fannie and Freddie that are properly priced to cover possible losses, and the need to motivate private lenders to provide more mortgages. Both notions were highlighted by Treasury Secretary Tim Geithner, who delivered opening remarks at the conference.
“This crisis — where we saw a full retreat by private financial institutions from many forms of mortgage and consumer lending — provided a compelling illustration of why private markets, left to their own devices, find it hard to resolve financial crises,” Geithner told the group, adding that the planned wind-down of Fannie’s and Freddie’s current portfolios “should be done in a careful way. And we need to make it absolutely clear that we will make sure the GSEs have the resources to meet their financial commitments” during the transition to any new secondary mortgage-market structure.
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Even though my business is directly tied to the success of the construction industry, I find it difficult to accept the continuation of the market distortions that helped create the housing bubble in the first place. The best thing for the long term health of the construction and housing industries, as well as our country, would be an extraction of the federal government from meddling in those markets. All bubbles burst, the real damage will be done as we attempt to keep them inflated for too long.