The House Republican budget plan's treatment of housing

With the FY 2011 appropriations process still unresolved (and a shutdown looking increasingly likely), House Budget Committee Chairman Paul Ryan (R-Wisc.) has been making the rounds in support of a Republican budget roadmap for FY 2012 and beyond.  Chairman Ryan argues that his budget resolution - titled "The Path to Prosperity: Restoring America’s Promise" - "tackles the existential threat posed by rapidly growing government and debt, applying the nation’s timeless principles to this generation’s greatest challenge."  

So how would the House Budget Committee's plan affect various federal housing policies and programs?  Here are some key excerpts from summary documents issued by the committee:

Reforming Fannie Mae and Freddie Mac

Since the government creation of their duopoly, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have dramatically altered mortgage markets in the United States, ultimately contributing to their precipitous collapse in 2008. Fannie’s and Freddie’s core business is to increase the supply of mortgage credit by purchasing loans and packaging them into mortgage-backed securities (MBS) that carry the GSEs’ guarantee of principal and interest. They also issue debt securities in the capital markets to finance purchases of mortgages and MBS they hold in their portfolios.

In the years leading up to the housing crisis, and with the help of some lawmakers in Congress, Fannie and Freddie abused their roles in stimulating homeownership. They began to replace prudent lending standards with a drive to guarantee and hold more mortgages, some of them risky, in order to maximize commissions. This squeezed much healthy underwriting out of the private sector, driving it increasingly to riskier, more exotic mortgage instruments. When the real estate market cooled in mid-2008, housing values began to nosedive, foreclosures rose sharply, and Fannie and Freddie experienced staggering losses as a result. The U.S. government was on the hook for the housing goliaths they had created and chartered.

The GSEs’ losses were so severe that they were placed into conservatorship in September 2008, with the Department of the Treasury taking a major ownership interest in both. As a result, CBO made Fannie and Freddie an explicit part of the federal budget, accounting for their liabilities as liabilities of the government. CBO estimated a $248 billion cost of bringing their existing losses onto the government books in 2009. While under conservatorship, CBO estimates that Fannie and Freddie could cost taxpayers an all-in $370 billion through 2021. In contrast, the administration does not fully account for the taxpayer exposure of Fannie and Freddie, instead leaving them off-budget.

So far, Treasury has bailed out Fannie and Freddie to the tune of $150 billion. Fannie Mae, Freddie Mac, and another government housing agency, Ginnie Mae, now own or insure 95 percent of the entire U.S. housing market. On their current course, the GSEs represent a failed experiment in corporate welfare and the largest bailout of financial institutions in recent history. Corporate welfare arrangements like the GSEs socialize risk by shifting losses to the taxpayers, but allow profits to accrue to management, bondholders and Wall Street institutions that trade mortgage-backed securities.

This budget will put an end to the practice of corporate welfare and taxpayer bailouts in housing finance. It proposes eventual elimination of Fannie Mae and Freddie Mac, winding down their government guarantee and ending taxpayer subsidies. It supports increasing the guarantee fees Fannie and Freddie charge lenders in order to bring private capital back, shrinking their retained portfolios, and enacting various measures that would bring transparency and accountability to the GSEs. At the same time, it will put in place measures to discourage shifting of taxpayer risk to the Federal Housing Administration and other government-backed entities as Fannie and Freddie are dismantled.

The housing-finance system of the future will allow private-market secondary lenders to fairly, freely and transparently compete, with the knowledge that they will ultimately bear appropriate risk for the loans they guarantee. Their viability and profitability will be determined by the soundness of their practices and the value of their services.

Protecting Assistance for Those in Need

Major proposals

  • Convert the Supplemental Nutrition Assistance Program (SNAP) into a block grant tailored for each state’s low-income population, indexed for inflation and eligibility beginning in 2015 – after employment has recovered. Make aid contingent on work or job training.
  • Encourage recipients of federal housing aid to lead lives of increased self-sufficiency by decreasing disparities between assisted and unassisted renters and by making aid contingent on work or job training.

The welfare reforms of the late 1990s are a success story of modern domestic policy, but they did not go as far as many think. Reformers were not able to extend their work beyond cash welfare to the other 77 means-tested programs that the federal government operates. Notably, programs that subsidize food and housing for low-income Americans remain dysfunctional, and their explosive growth is threatening the overall strength of the safety net. If the government continues running trillion-dollar deficits and experiences a debt crisis, the poor and vulnerable will undoubtedly be the hardest hit, as the federal government’s only recourse will be severe, across-the-board cuts...

Spending on Federal Housing Assistance... isn’t growing due to flawed state formulas or even because of the recession – it is growing because policymakers are choosing to grow it, and because there are no time limits or work requirements that encourage recipients to lead lives of increased self-sufficiency. Federal rental subsidies have increased by 33 percent since 2006, and the President’s budget would increase them even further. This is taking the nation’s welfare policy in the wrong direction – America needs a strong safety net, not one that is strained to the breaking point.

As it does with regard to Medicaid, this budget would extend the successes of welfare reform to food aid and housing by implementing reforms that give states more flexibility to meet the needs of low-income populations and to make sure that the truly needy receive the assistance they need to live meaningful, independent lives...

With regard to housing, this budget calls for federal time limits and work requirements to extend the successes of welfare reform to rental assistance programs. It reduces incentives for dependency by narrowing the gap between assisted renters and unassisted renters with the same income levels, while continuing to provide a safety net to make sure that those with very low incomes can afford housing. Finally, it stops the explosive growth of this program so that aid can be focused on the truly needy.