Political reform is difficult. When things are good, no one feels that there's a need for change. But when things are bad, change can sometimes make things worse. So it should come as no surprise that some people have begun questioning whether or not the right time to approach housing market reform is when residential real estate continues to struggle. It is, because it won't work at any other time and won't cause significant harm if done carefully.
Now Is the Best Time for Reform
The need for housing policy reform can be summed up by the famous quote by President Obama's Chief of Staff Rahm Emanuel: "You never want a serious crisis to go to waste." While this is a political concept, it can easily be applied to more practical matters. For example, if your computer has a virus, you might not know it if it's latent. But as soon as it begins screwing up your PC, you realize that you must fix it. For decades, housing policy was flawed, but only recently has it become clear just how deep its problems are.
If policymakers simply allow the dark clouds to blow over, then another crisis will eventually follow. Going back to the analogy above, that would be like continuing to use your computer without removing the virus. Eventually, it will get worse and you might have an even more serious problem on your hands. Similarly, ignoring the housing policy problem in the U.S. could lead to an even worse crisis one day if it is not addressed.
But What About the Market?
Yet, some argue that reform while the housing market is so fragile could be dangerous. From a Wall Street Journal article today:
"It pulls the debate in the opposite direction," said Howard Glaser, an industry consultant. "If we're stuck in the midst of this semi-permanent housing crisis, the question of the federal role becomes almost intractable."
And another today from the Financial Times:
Without government backing, some large investors have said they would stop buying mortgage bonds, a development that would be catastrophic both for the housing market and the broader economy.
There's little doubt that opponents of reform have an easy way to argue against it, given the housing market woes. If you wallop an already stunned Fannie and Freddie, or strictly restrain the Federal Housing Authority, then it will be even more difficult for prospective home buyers to obtain mortgages. Then, inventory will increase faster, prices will decline further, current borrowers will find themselves more underwater, and the vicious cycle will continue.
A Reasonable Approach
Despite this challenge, reform is still possible. No one who seeks to propose a serious policy shift would recommend that Fannie and Freddie be shuttered immediately. Instead, changes should be gradual, over the span of five to 10 years, and possibly even set in motion but mostly delayed for another year or two until the housing market becomes more stable.
So the changes might not all take effect immediately, but the reform effort shouldn't be postponed. New laws and regulations could be created to set these changes into motion immediately. This is the right approach for several reasons. First, it ensures that lawmakers won't simply allow this crisis to pass and ultimately ignore the need for reform. Second, it provides the private sector -- as well as regulators -- certainty about the future. They will know what to expect. Third, it gives these parties time to brace themselves for what will be a big market shock. Finally, it allows for easier tweaking along the way if some of these changes aren't working out as well as anticipated.
The housing policy fight in Washington over the next year will be an interesting one to watch. Over the past year, politicians have made abundantly clear that they don't fear economic repercussions that could result when certain industries are reformed -- including health care and banking. But when faced with an industry more deeply entrenched in government like housing, they might not be as eager to act. They should call for reform, but they need to structure changes prudently to allow the market to adjust.