Financing Housing

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A number of discussions were held during NLC’s Congress of Cities on the topics of housing, housing finance and home mortgage foreclosures.  From these discussions a picture emerges that is hopeful at one level but deeply troubling at another.

Despite the improvements in the housing sector in the form of sales prices, construction permits and foreclosure declines, mortgage financing remains a complex and risk-prone proposition.

The S&P/Case-Shiller 20-city home price index is up for 18 metro markets (New York and Chicago excepted). Prices are up 7 percent through the first nine months of 2012 which is the strongest performance since 2005.

However, mortgage financing through FHA still accounts for a much higher proportion of mortgage loans than is desirable or sustainable over time. The status of Fannie Mae and Freddie Mac remain unpredictable and are a source of continued anxiety in the market.

More disturbingly, the massive losses from securitized mortgages in the portfolios of the GSE’s are an ongoing drain on Federal resources and the taxpayer. The Federal Reserve is buying up on average $40 billion per month of Fannie and Freddie mortgage backed securities.

Mainstream financial institutions need to return to the market for mortgage origination for the average consumer. Improvements in the housing and real estate markets and rising demand may eventually lure banks back into this business. But the unknown and unpredictable disposition of a fully functioning secondary mortgage market will inhibit increased private sector involvement.

Until some kind of reform is implemented for the GSE’s the Feds will continue to be the lender of first resort and the great and powerful guarantor of all risks in the market. That is, and will continue to be, an untenable position.