Why the Federal Role Is Vital

Congress is in the midst of a fundamental debate about the federal government’s role in the residential mortgage finance system. On the table are some of the most basic forms of assistance to home buyers and the real estate industry, including the mortgage interest deduction and the government’s backing of conventional mortgage securities through Fannie Mae and Freddie Mac.

Against this backdrop, NATIONAL ASSOCIATION OF REALTORS® President Ron Phipps has invited REALTORS® to share their support of and their concerns about NAR’s long-standing position in favor of a continuing federal presence in mortgage finance. Here, Phipps explains why NAR takes the position it does on this very timely topic.

NAR suggests that we can increase home sales by preserving the MID and maintaining government backing in the mortgage market. Some may say these things are more about maintaining the status quo. How will they drive up sales?

Phipps: The real estate market is underperforming by 20 percent. We’re at the level of home sales seen in 2000—yet we have 30 million more people living in the United States today. A federal commitment to maintaining the MID and government backing would bring certainty to buyers and investors, a necessary first step to closing that 20 percent performance gap.

Why should the federal government even have a role in housing?

Phipps: The ideal marketplace is one in which home buyers transact business with private lenders. History reminds us, however, that the federal government plays an important role in regulating lenders and ensuring the smooth flow of capital. In tough economic times, private financing may simply choose to exit the market. The government also protects borrowers from predatory lending practices. One of the lessons of the mortgage market meltdown is that banking regulators weren’t doing enough to rein in bad lending practices.

How do Fannie Mae and Freddie Mac fit into our mortgage system?

Phipps: The government-sponsored enterprises have traditionally played two important roles. By purchasing mortgage loans and securitizing the loans for sale to investors, they’ve enabled lenders to have ready capital to make more loans for home purchases. Second, by setting underwriting standards, Fannie Mae and Freddie Mac have helped ensure the quality of the collateral for investors and created a level playing field for consumers.

But some say Fannie Mae and Freddie Mac  "standards"  were one of the main causes of the mortgage meltdown.

Phipps: Almost all investigations have agreed that the GSEs were only one factor in a systemwide breakdown. It was the private-label securitization of bad loans—and the packaging of those securities into “tranches” whose risks to investors were not accurately rated—that led the way to the crisis.

So why is NAR speaking out in support of the GSEs?

Phipps: To be clear, NAR does not believe that Fannie Mae and Freddie Mac should be reconstituted as they were before the crisis. The public mission of the entities—to ensure the flow of mortgage capital—cannot exist alongside a private profit motive. More than a year ago, an NAR working group released a set of principles for reforming the GSEs into government-chartered, non-shareholder owned authorities subject to strong regulation.

Why do we need a secondary mortgage market? Why not let the private market take the risk?

Phipps: Without a secondary mortgage market, private lenders would likely do away with the 30-year fixed-rate mortgage because of the interest-rate risk to lenders and investors. The market would be primarily shorter-term and adjustable-rate mortgages, which put the risk on the borrowers instead of large institutions like insurance companies and pension funds.

Why is it so important to protect the 30-year fixed-rate mortgage?

Phipps: It has provided generations of Americans with a chance to own real estate and build wealth over time. In the 1930s, NAR fought for the creation of a secondary mortgage market that helped usher in this safe, affordable form of financing, and it’s why we’re fighting for reforms today.