The Real E(state) Of The Union Address

obama real estate The State of the Union Address rightfully draws the attention of most Americans and certainly Capitol Hill insiders, because it offers a preview of the top policy issues for the coming year.

If you're wondering what relevant clues the President's most recent 2013 State of the Union might have to offer the real estate investor community, keep reading.

The Focus Just Ahead

Based on the President Obama’s speech, this year the legislative session will be dominated by budget issues, immigration reform, and gun control.

Where does that leave housing issues for 2013? Certainly not at the top of the list, but that observation comes with two reassuring footnotes:

First, most of my work on behalf of the real estate investing community is performed through FHFA. So our agenda can be accomplished without a legislative remedy.
Secondly, the House is definitely working on a reform package for Fannie and Freddie, so there will be at least some debate on broad housing issues.

A Few Real Estate Nuggets

President Obama did however make a few noteworthy comments on housing that are worth reviewing.

For starters, he discussed refinancing and the idea of the government rehabbing abandoned properties. Neither of these concepts is new actually – the Administration has been pushing for both for several years now.

The president also remarked that the housing market is “healing.” I think this may be right, but as I have shared with you here previously, I am concerned that inflated valuations are creating the appearance of a recovery, and the number of past due and “zombie” foreclosures remains perilous.

Do We Really Want an “Ownership Society”?

The president made one comment that I found particularly striking, and it is worth dissecting.

He remarked that many “credit worthy” Americans are still unable to obtain a home loan. This is reminiscent of his predecessor’s comments about creating an “Ownership Society” and the notion that home ownership borders on a right.

Is home ownership really an American right?

Now in the president’s defense, there is a delicate balance that must be struck. On the one hand, the government bailed out major lenders for the express purpose of making credit more available. But the bailout was deemed necessary in the first place thanks to banks loaning out money to individuals who weren't credit worthy in the first place.

This comment seems a bit out of touch considering the current state of FHA.

The Government’s Version of Countrywide

During a recent meeting on Capitol Hill, a lawmaker commented to me that FHA was the government’s version of Countrywide.

Now as Congress debates the possibility of a roughly $17 billion bailout for the agency (FHA can actually draw the money directly from Treasury without Congressional approval, but Congress wants to weigh in anyway) necessitated by making bad loans, it seems odd the Administration would be calling for a broadening of mortgage lending, doesn't it?

Refinancing…

One final thought on the State of the Union Address concerns refinancing.

This has been tried many times before over the past several years. Data provided by FHFA suggests there has been improved performance with the existing programs. However, it seems to me the problem has not been the availability of refinancing programs. The issue has been the performance of the borrower.

Let’s be honest: The re-default rates have sunk these programs. Ultimately, if a borrower is unemployed or under-employed, these refinancing programs cannot perform.

The Congressional plan for housing reform will start with the chairman of the House Financial Services Committee, Texas Republican Jeb Hensarling. In a recent article I discussed in broad terms the prospects for reforming Fannie and Freddie. In terms of the specifics of the reform plan that will be introduced this year in the House, we can look to past legislation sponsored by Hensarling as a starting point.

Kill Fannie and Freddie?

There seems to be little question Hensarling wants to eliminate Fannie and Freddie. His legislation creates a legal framework to end the conservatorship, institutes a structured winding down of the entities, and ultimately revokes their charters.

And the plan actually makes sense in that it addresses a critical issue: the notion of “too big to fail.” The government (taxpayers) provided Fannie and Freddie an implicit guarantee of their mortgages, thus giving them a massive competitive advantage. But in reality, the government cannot guarantee any entity if effectuating the guarantee means driving the country into a depression.

Hensarling will need to improve the plan if it has any chance of moving beyond the House. While it addresses “too big to fail” it does not address some basic issues.

Without entities that enjoy what is now clearly an explicit government guarantee, how will the price of mortgages be contained?
What entity or entities will be created to provide the traditional 30-year fixed rate mortgage?
What are the consequences for borrowers, lenders and the overall housing market without the presence of Fannie and Freddie?

My work will continue both at FHFA and in the halls of Congress. If Mr. Hensarling can provide an alternative plan that ends the “too big to fail” issue and addresses how the benefits Fannie and Freddie brought to the housing market can be replaced, housing reform could have some legs this year.

The legislation will be introduced soon, and I will provide a summary in an upcoming article.