7 Questions Washington Must Answer to Fix Housing Policy

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With President Obama signing the big financial regulation bill today, Washington will feel like it's done enough for a while when it comes to making new rules for banks and Wall Street. Next on its 'to do' financial policy checklist is housing. After all, the biggest hole in the Dodd-Frank bill was a complete lack of reform for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

But one of the legislation's chief architects, House Financial Services Chairman Barney Frank (D-MA), has already indicated that the GSEs and housing policy will be a major focus going forward, with hearings starting in September. The White House has also said that officials will release a new housing strategy sometime next year. Experts are also beginning to weigh in. A special series from The Economist provides some good ideas. Another piece in the recent edition of the National Review also argues for key changes. What should be done?

Back in April, the Treasury provided a good list of seven questions for comment on Housing Policy. If you want to weigh in, you'd better act fast, because they're due today. Here are the seven questions, and some very brief responses I would provide, based on my pre-journalism background in economics, mortgage consulting and asset-backed securities:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy? [Commentary could address: Policy for sustainable homeownership; rental policy; balancing rental and ownership; how to account for regional differences; and affordability goals.]

Really, the easiest and most effective solution would be for the government to get out of the housing market entirely. But since that isn't likely to happen, at the very least the ends of providing affordable housing and liquidity should be sought separately. One big problem with Fannie and Freddie was that these two goals became intertwined.

The affordable housing function is probably a more appropriate area for government involvement, in terms of priority. Therein, renting is a more sensible option for low-income individuals who seek government assistance. The market can evolve through time to provide its own liquidity, once weaned off government-guaranteed funding.

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives? [Commentary could address: Level of government involvement and type of support provided; role of government agencies; role of private vs. public capital; role of any explicit government guarantees; role of direct subsidies and other fiscal support and mechanisms to convey such support; monitoring and management of risks including how to balance the retention and distribution of risk; incentives to encourage appropriate alignment of risk bearing in the private sector; mechanisms for dealing with episodes of market stress; and how to promote market discipline.]

Ideally, the federal government shouldn't play any role in supporting the mortgage market. If it merely removes its influence, then the market will actually function much better in the long-run. Of course, thanks to political pressures, this dream will never come to be. As a result, any interference should be transparent and based on very conservative assumptions. Any guarantees or other support the government provides should be brought on balance sheet.

3. Should the government approach differ across different segments of the market, and if so, how? [Commentary could address: Differentiation of approach based on mortgage size or other characteristics; rationale for integration or separation of functions related to the single-family and multi-family market; whether there should be an emphasis on supporting the production of subsidized multifamily housing; differentiation in mechanism to convey subsidies, if any.]

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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