The death of Senator Robert Byrd (“an institution within an institution” is what President Obama called him) may be the butterfly wings that alter the financial landscape of the United States. Without him, it is not entirely clear whether there are 60 votes to pass the financial regulatory reform bill. For example, Scott Brown, who voted for the Senate version of the bill, may vote against the final version because of the bank tax; Feingold and Cantwell may not vote for it because they don’t think the bill is tough enough; and the other Republican Senators who voted with the majority on the Senate bill, including the twin Maine senators, are also back in play. So if the votes break according to party lines, it won’t pass. As of this writing, the conferees are re-assembling to figure out what to do to secure passage. This will push back and possibly reshape the bill, and thus delay the next item on the legislative agenda (at least from a financial services perspective) -- reforming the housing finance system in the United States.
On April 22, the Treasury Department issued a request for public input on the topic, with responses due by July 21. The seven questions are open-ended and focused on suggestions for appropriate governmental housing policy objectives. They are the right questions to be asking at a time like this (e.g., “How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?” and “What risks, if any, should the federal government bear in meeting its housing finance objectives?”), but acting on them while the condition of the housing market is still so tenuous is tricky. After all, the housing market—and the housing finance market—is dealing with the aftermath of the mortgage credit bubble and will be for some time. Just a few examples of this are in the following graphs that illustrate how the market is still broken.
The graph below, click to enlarge, shows how the spread between the Freddie Mac (FRE) commitment rate and the jumbo mortgage rate, currently 131 basis points, has not returned to its pre-bubble average of 40 basis points.
The next graph (click to enlarge), which compares the first-time homebuyers affordability index to the Mortgage Bankers Association purchase index, a measure of mortgage applications for buying a home (as opposed to refinancing), points out the paradox that the index of mortgage applications to buy a house continues to decline even as homes have never been more affordable.
The last graph (click to enlarge), illustrates the extent to which the US mortgage agencies, Fannie (FNM), Freddie and Ginnie, now almost completely dominate the mortgage securitization market.
Needless to say, there are other examples of how the housing and mortgage market is struggling, including the continuing rise in defaults and delinquencies, the intractability of the foreclosure problem, the utter collapse of new home sales after the expiration of the homebuyers’ tax credit and the chronic oversupply problem. Whatever happens with housing finance reform will affect the clearing level for home prices and Americans’ ability to access the mortgage market. Once the government decides what their housing goals are, we’ll be in a better position to determine the consequences, intended or otherwise. We’d like to think Senator Byrd would have enjoyed the debate.