US housing policy's impact on Hilton Head, Lowcountry

Recently I had the opportunity to attend my 25th annual Mid-Winter Housing Finance Conference. The “Mid-Winter” is an invitationonly gathering of senior federal policy makers, regulators and housing finance industry leaders that has been in existence for more than 40 years.

As I think back on my 25 years of participation, I cannot help but reflect on the changes that have occurred since my first meeting. It all started with savings and loan banks controlling the dialogue, then to the larger mortgage banks, then to the government-sponsored enterprises (Fannie Mae and Freddie Mac), then to the subprime lenders and Wall Street types.

This year’s meeting could not have come at a better time as it coincided with the announcement of the Johnson-Crapo GSE reform bill. This bill provides a pathway for the eventual wind down of Fannie Mae and Freddie Mac and suggests a mechanism to continue the federal role in residential mortgage finance.

And if that were not enough, we saw Congress pass the Flood Insurance Affordability Act of 2014. This act repeals and modifies provisions of the Biggert- Waters Flood Insurance Reform Act and should postpone flood insurance premium increases for most of us.

So why should we care about this sudden interest in housing policies in Washington, D.C., and how might the outcomes affect us on Hilton Head Island and Beaufort County? And, by the way, is it not about time for Congress and the President to deal with the “evil twins,” Fannie Mae and Freddie Mac? They were, of course, the cause of the housing bubble that led to the Great Recession!

Let us try to deal with the “why care?” question first. On a national level the concept of homeownership is often seen as the bedrock of building wealth in America, and beyond wealth-building, it has long been viewed as a stabilizing force in our communities.

When a family owns a “piece of the rock” they are, in fact, invested both financially and emotionally in the community in which they live. In Hilton Head Island, I believe that we all aspire to be a community that is wellbalanced; is vibrant in economy and diversity; and is financially sound.

These traits are by-products of high levels of homeownership. It is time for all of us to stand up and demand that our leaders in Washington, D.C., articulate a national housing policy that encourages homeownership but recognizes that there is a substantial role for quality rental housing.

Locally, real estate and tourism are the legs on which we stand. Our economic fortunes, as well as our quality of life, are dependent upon potential home buyers feeling confident while making their real estate investment decisions.

A major factor in most real estate transactions is the availability of financing at a reasonable price.

Since the creation of the Federal Housing Administration’s financing program in the 1930s, Americans have enjoyed what others in the world could only dream of -- a 30-year, fixed-rate mortgage.

The availability of the 30-year, fixed-rate mortgage was further institutionalized with the creation of Fannie Mae, and later Freddie Mac, as government-sponsored enterprises or GSEs.

These two shareholder-owned, government-sponsored companies grew to the point that they were involved in over 80 percent of the residential real estate finance transactions nationally and the other 20 percent being handled by Ginnie Mae or portfolio financing provided by local banks and private label securities.

At the peak of real estate lending in 2008, there was more than $14 trillion in mortgages outstanding in the United States.

For the three years prior, the United States was producing well in excess of $3.5 trillion in new loans annually. With the collapse of the real estate markets and the bursting of the balloon, both Fannie Mae and Freddie Mac were placed in conservatorship and have since been held under the control of the Federal Housing Finance Agency (FHFA).

Through the conservatorship the United States Treasury (UST) has made good on its “implied” guaranty of Fannie Mae and Freddie Mac debt to the tune of $187.4 billion. By the way, since 2011 all of that has been repaid and these two GSEs continue to turn over 100 percent of their quarterly profits to the UST.

So again, why is this pending attempt at GSE reform important to us on Hilton Head Island? The answer is simple. If we are interested in stable housing prices and protecting what is probably our largest single investment, our home, we actually need federal government involvement in the continuation of a 30-year, fixedrate financing and providing an “explicit” guaranty of mortgage securities.

The mortgage market is simply too large in the United States to attract capital from around the world without government support. Both the Bipartisan Center for Policy Research and a bipartisan group from the Senate Finance Committee understand these facts and have proposed a workable solution that puts private capital in a first loss position and funds a catastrophic loss pool with the UST stamp of approval on it!

Hopefully a large group of clear thinking senators and congressmen can come together and do what is right to keep homeownership a priority in the United States … Hilton Head Island included!

Elihu Spencer is a local amateur economist with a long business history in global finance. His life’s 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.