Fed Dissenter Hoenig Offers Input on Housing Finance Reform

by devteam November 6th, 2010 | Share

Thomas  M. Hoenig, president of the Federal ReservernBank of Kansas City, characterized the recent housing collapse as a classicrnasset-price bubble spurred by low interest rates, easily accessible andrnoften-unsound financing, over-optimism about housing price trends, and a high -rnand difficult to control – level of subsidies that flowed into housing.  The few exceptional years of housingrnactivity, he said, do not come close to making up for the economic recession,rnforeclosures, erased wealth and slow recovery that we are now experiencing.    In remarks to the National Association ofrnRealtors (NAR) at its annual meeting in New Orleans on Friday, Hoenig called forrna new housing policy that requires greatly reduced governmental interventionrnand public subsidies.</p

There are severalrnfactors that argue for this approach, he said. rnFirst, the crisis clearly shows that a mortgage finance system based onrnencouraging the ratio of debt to equity places households at significant riskrnand creates unsustainable trends in housing expansion.  Such policies also create harmful distortionsrnin the economy and are enormously expensive to both homeowners and taxpayers,rnespecially when things go wrong.  Many housingrnsubsidies are structured to allow parties other than homeowners to capture mostrnof the benefits. Finally, the growing budget deficits and numbers of interestsrncompeting for funds make it unrealistic to think housing can continue torncommand the same portion of public funds and taxpayer support.</p

The first step inrnchanging housing policy should be reform of Fannie Mae and Freddie Mac.  Hoenig cited the $170 million the tworngovernment sponsored enterprises (GSEs) spent on lobbying in the decade beforernthey were placed in receivership where they have and will cost taxpayersrnhundreds of billions.  “Given therncosts and market distortions these (GSEs) brought with them, we should bernconfident that they should not be allowed to operate in the future as they havernin the past.”</p

Hoenig suggestedrntwo basic options for GSE reform.  If itrnis decided that some public support is needed, the government could establishrnpublic entities that focus solely on the securitization of well structuredrnconventional conforming loans and with balance sheets limited to amountsrnnecessary to warehouse loans for securitization.  This would limit government’s role to that ofrna conduit; facilitating the flow of capital but not providing anyrnguarantees.  The market would remain thernfinal arbiter of standards and funding.     </p

A second optionrnwould allow private entities the sole authority to securitize conformingrnmortgages with a federal guarantee given to some securities backed by mortgagesrnmeeting strict standards, but only where the loans fill a special need orrnpurpose.  This option, Hoenig said, wouldrnpromote greater market discipline and insulate the process from politicalrninfluence and control.</p

Apart fromrnreforming the GSEs, the nation must insist on a return to sound real estaternlending standards Hoenig said.   Otherrncountries did a better job of maintaining debt and loan to value ratios, butrnthere was a tendency in the US to also establish standards that encouraged highrnhousehold leverage.  It is necessary thatrnwe take a closer look at the loan-to-value guidelines followed by depositoryrninstitutions but we should also make sure that these guidelines are appliedrnequitably to other lenders as well. rn</p

Other lending provisions, subsidies and public policies also need to bernexamined including risk weights for mortgage loans and mortgage-backedrnsecurities under the Basel capital requirements, state and federal taxrndeductions for mortgage interest, credit agency assessments of MBS, and otherrnpublic housing policies.  The key tornreviewing policy is to consider whether each policy encourages homeownership inrna cost effective manner without putting homeowners at high risk.  He cited a presidential panel’s findings inrn2005 that the federal tax deduction for mortgage interest provided “anrnincentive to take on more debt” and encouraged overinvestment in housingrnand was a benefit not shared equally among all taxpayers. </p

Hoenig concludedrnby stating that “many countries have achieved higher homeownership ratesrnwithout – and perhaps because they don’t have – many of the special privilegesrnof U.S. housing finance, such as GSEs, minimal down payments, 30-yearrnfixed-rate loans and mortgage interest tax deductions.  To this list we could also add non-recourserndebt instruments, government promotion of ‘creative and flexible financing,’rnthe ability to prepay loans, affordable housing goals, and similar governmentrnhousing programs.”</p

Hoenig said he isrnnot suggesting we do away with all support for housing, he is saying it is timernfor a change.    </p

READ MORE: Call for Bipartisanship: Congress Must Focus on the Future of Housing </p

READ MORE: Largest Lenders Control Mortgage Industry. Time to Engage Community Bankers</p

READ MORE: Denationalizing Housing in America. Calling on the Private Sector

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of is prohibited.

About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

See all blogs


Leave a Comment

Leave a Reply

Latest Articles

Real Estate Investors Skip Paying Loans While Raising Billions

By John Gittelsohn August 24, 2020, 4:00 AM PDT Some of the largest real estate investors are walking away from Read More...

Late-Stage Delinquencies are Surging

Aug 21 2020, 11:59AM Like the report from Black Knight earlier today, the second quarter National Delinquency Survey from the Read More...

Published by the Federal Reserve Bank of San Francisco

It was recently published by the Federal Reserve Bank of San Francisco, which is about as official as you can Read More...