Tuesday, August 3, 2010

Welcome to the Recovery?

Now that financial reform has been signed into law, Treasury Secretary Tim Geithner is on the road taking his message to the banks, and to Wall Street yesterday, and to regular folks like us in the Op Ed piece that he wrote for the New York Times. The title of today's post is taken from Geithner's Op Ed piece published yesterday in the New York Times entitled, "Welcome to the Recovery." I have decided to personalize Geithner's title with a question mark, although frankly, I think a better title for both Geithner's Op Ed piece and this post could come from heavy metal artist Alice Cooper's 1975 album, "Welcome to my Nightmare."

Geithner's article in the New York Times stresses that while millions of Americans are still out of work and suffering, there are tangible signs that the economy is improving, which include booming exports, the return of private job growth, and "businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow." "The devastation wrought by the great recession is still all too real for millions of Americans who lost their jobs, businesses and homes...The uncertainity is understandable, but a review of recent data on the American economy shows that we are on a path back to growth."

In his speech at NYU, however, Geithner was a little less sunny and upbeat, although he encouraged the financial industry to fall in line behind the new financial reform bill and start implementing reforms themselves, rather than just waiting around for the regulations to be written. According to the Washington Post, "At NYU Geithner said other tough reforms lie in the months ahead, namely an overhaul of government backed mortgage giants Fannie Mae and Freddie Mac..."

And the overhaul of Fannie and Freddie is going to have a huge impact on housing and real estate. Remember that the Dodd Frank bill left Fannie and Freddie intact, and no plan to sunset either of these entities was included in the final bill. However, the bill does call for a study of Fannie and Freddie to be completed by January, 2011. This study is supposed to be presented by Tim Geithner to Congress, and now, with just 5 months remaining before the study is due, the government is reportedly trying to come up with some ideas of how to handle the Fannie/Freddie situation.

Toward that end, the Obama Administration is hosting a Conference on the future of Housing Finance at the Treasury Department on August 17. The conference was announced and posted on the Treasury Department's website on July 27, 2010. According to the Treasury Department's website, "This event will bring together leading academic experts, consumer and community organizations, industry groups, market participants, and other stakeholders for an open discussion about housing finance reform." The website goes on to quote HUD Secretary Shaun Donovan, "The Obama Administration is committed to engaging stakeholders and the public as we consider proposals for reforming the housing finance system. The need for reform is clear and we want to listen to a wide range of views as we chart a course to a more robust and stable housing market that works for the benefit of the American people."

Certainly, everyone agrees that something has to be done about Fannie Mae and Freddie Mac. In a great irony, Fannie Mae, which actually was chartered during the 1930's as a response to first Great Depression, is now about to fall victim to the Great Recession. Taxpayers could and probably will spend an estimated $400 billion bailing out Fannie and Freddie--together they will probably comprise the biggest of all bailouts. But the question is, what sort of system will be put into place to replace them. Barney Frank has said candidly that a public/private hybrid model (which Fannie and Freddie were before they were taken over by government in the fall of 2008) does not work. Conservatives have stated openly that they agree and that the government should be out and private enterprise should take care of the flow of money necessary to back mortgages. But since the financial reform bill did not address this issue at all, and the all-private concept has been around for a while, we can be fairly certain that the government has something else in mind entirely.

My own personal opinion is that the conference on August 17 is nothing more than a dog and pony show to make members of the housing industry and consumer advocates perceive that they have been involved and engaged in the reform process. It is inconceivable to me that the authors of a 2300 page comprehensive financial reform bill which creates multiple new agencies and enormous new bureaucracy seriously don't have any idea how they want to deal with the issue of Fannie and Freddie. And if they are rejecting the concept of a completely privatized model, then that only leaves the option of a totally public one--a new government agency which will provide mortgage capital. And that, I believe, is exactly where this is headed. Sometime next year, I believe that we will see a new blueprint rolled out for a new government agency, and a plan to sunset Fannie and Freddie.

However, we are also getting some clues to the fact that this new entity, whatever it may be, will be less generous with its money than the ones it is replacing. Consider a Newsweek article published July 23, 2010, entitled, "Wall Street Whispers: Will Obama Slay the Fannie and Freddie Beast?" Look at this paragraph from the article, "The Obama administration appears to be suggesting--very subtly--that homeownership isn't a God given right. That the American dream has morphed into an American entitlement. That millions of people who should not have been homeowners in the first pace ended up paralyzed by unsustainable debt as a result...'This crisis reaffirmed the need to achieve a better balance between ownership and rental housing,' Hud secretary Shaun Donovan told lawmakers this spring.'" The Newsweek article goes on to quote Raphael Bostic, a senior HUD official and a "leading scholar on home finance and key policy adviser", whom the Washington Post quotes as recently stating, "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go. You're not going to hear us say that." And Newsweek goes on to say, "The most sensible and politically palpable option may be something in between--explicit guarantees with more strings attached, fewer incentives for Americans to buy homes, and more incentives for them to rent if they can't pay down hundreds of thousands of dollars over a 30 year time frame."

I agree that homeownership is not an entitlement. During the Bush years, we saw an initiative to put 5 million new Americans into homes in the hopes that Americans who purchased homes would become more responsible members of the community. That did not work because it was based on the government determining that Americans needed to buy houses. But now we see apparently a new initiative--much less well publicized--that Americans need to not buy houses.

What I want to know is why the decision to buy or to rent is a decision that the government should be involved in at all. Newsweek talks about incentives to purchase versus incentives to rent as if adult Americans are not capable of looking at their own situations and determining that they need a roof over their heads and then taking appropriate steps to secure one.

Over the course of 12 years in housing finance I have met a lot of people who dreamed of buying a home. But the people who were serious about buying one made it happen. If they had to wait while they paid off debt, they did so. If they had to save money for a down payment, they did that. The most effective incentive to purchase that the most motivated buyers had was their basic belief that owning was preferable to renting. And I have worked with other borrowers who had really good income and very good credit, but they never purchased a home. Some of these borrowers would open a contract every year on a property which they dreamed about owning but when the time came to purchase, they walked away. It was not that they could not afford the property--it was just that for them as individuals, renting seemed safer than buying. That is a decision that no one else can make for a person--the individual must make it for themselves.

And this is what I find troubling about this whole idea that the government should decide whether we as Americans rent or buy. That is like deciding for another person whether they should marry or remain single--it is a highly personal choice which really should be made by the person affected and no one else. We don't all get to marry the person we want to marry, and we don't all get to buy the house of our dreams. But that does not mean that we may not choose to marry someone else, or buy a different house that meets our needs just fine. And it should be our choice--not that of some bureaucrat doling out mortgage money as they see fit.

The Declaration of Independence says that we have right to life, liberty and the pursuit of happiness, which really just means an opportunity to pursue those things that we hope will bring happiness. Happiness is not a guarantee; neither is the attainment of anything else we pursue. But we should have the opportunity to try. Homeownership is the American Dream because in this country, through hard work and diligence, people have always been able to purchase their own homes. No administration should be able to say whether or not any given person deserves to have a chance at attaining that dream for themselves.

No comments:

Post a Comment