An update of housing finance policy

After eight often challenging years, Hilton Head Island real estate appears to be making a comeback.

Despite the headwinds caused by property taxes on second homes and investment real estate, as well as the growing cost of flood insurance, the prices and volume of real estate sales are increasing.

One remaining challenge to a "normal" real estate market is access to mortgage credit. Access to credit, or market liquidity, is the key ingredient for orderly markets. After the 2008 financial crisis, many private sources of mortgage capital dried up. The market for private residential mortgage-backed securities, the source of most "non-conforming" mortgage loans, evaporated. Investors fled to "conforming" real estate-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, government-sponsored enterprises that were viewed as being guaranteed by the U.S. government.

As explained in “The Big Short: Inside the Doomsday Machine,” Michael Lewis’ bestseller about the mortgage debacle, the implosion of the mortgage “asset bubble” resulted from excess leverage driven by the availability of excess credit. In other words, too much money was loaned to people who could not afford it based on the supposed "security" of their real estate. (Over the years, there have been other bubble implosions based on speculative security as diverse as tulips, silver and technology stocks, but the more recent real estate bubble really affected a lot of us.)

Despite the problems in funding private residential mortgages, the financial crisis of 2008 would have been far more severe if we had not had continued access to mortgage credit provided by Fannie Mae, Freddie Mac and Ginnie Mae. These agencies performed as promised through the financial downturn, though the federal government had to pump in adequate capital and put the agencies in a federally controlled conservatorship under the Federal Housing Finance Agency.

According to industry sources, Fannie Mae, Freddie Mac and Ginnie Mae have since returned $50 billion more to· the U.S. Treasury than they received.

Understanding the critical role that these agencies play in providing mortgage credit is important as we explore what role the federal government should play in future mortgage financing. We need a permanent answer as to how we can provide mortgage liquidity and preserve the long-term fixed-rate mortgage. The current status of effectively operating as a subsidiary of the U.S. Treasury must eventually end.

S.C. Congressman Mick Mulvaney recently proposed Bill HR 4913, the Housing Finance Restructuring Act of 2016. The bill, while well intended, likely will not become law because it would basically just recapitalize the existing government-sponsored entities and remove federal supervision. The bill would not resolve the weaknesses that existed before the 2008 financial crisis.

So, if we do not go "Back to the Future," what do we do?

FHFA has proposed a single security platform for Fannie Mae, Freddie Mac and Ginnie Mae that would support residential mortgage-backed securities or 15- and 30-year loans. FHFA's goal is have common credit criteria and loan administration guidelines for all government-sponsored entities while enforcing the current ban on lobbying activities that caused so many problems in the past. Unfortunately, Congress has not been willing to deal with these issues.

Citizens of Hilton Head Island, the state and the nation should begin to focus on implementing a new housing finance system — one that will protect the U.S. taxpayer while preserving fixed-rate residential mortgage financing across the country.

Elihu Spencer is a local amateur economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.