If you’ve been following HousingWire REwired over the course of the past few weeks, you may be familiar with the growing debate between James Carr with the Center for American Progress and Peter Wallison with the American Enterprise Institute.
If you missed it, here’s a recap: Wallison suggested to Congress that special interest groups — like Realtors and other housing-related firms — wanting to see more mortgage lending have created markets that institutionalize risky lending in a move that inevitably leads to dangerous bubbles. Wallison gains his credence from a career working as general counsel for the Treasury and on mortgage lending issues.
Carr with Center for American Progress objected to the idea that groups, such as those focused on affordable housing and predatory lending, are somehow encouraging bad practices in lending, so he pushed back in his own Op-Ed piece, which you can read here.
Then, Wallison disagreed with Carr publicly, saying he too dislikes predatory lending, but he is really talking about the bad lending practices that are built directly into the housing system–that system being the federal housing agencies.
If you’ve followed the debate so far, it seems like these two have nothing in common. But alas, we discover there is something of a meeting of the minds.
Here’s James Carr’s latest piece: “A Progressive and Conservative in Agreement on Housing?” (I know that seems an amazing feat, but anything is possible).
So someone has extended an olive branch, and it looks like they agree on more than they first thought.
Here’s the latest from James Carr:
“A Progressive and Conservative in Agreement on Housing?”
Mr. Wallison’s response to my op-ed titled “The Great (Fake) Debate” reveals that when the ideological rhetoric is removed, he and I, perhaps surprisingly, have more views in common than one might assume at first glance.
Imagine that, a progressive and conservative somewhat agreeing on basic principles regarding the future of the housing finance. What next, a Congressional budget agreement?
Mr. Wallison and I have common ground on three basic points. First, we agree that markets are not self-regulating. This agreement is refreshing, since many conservatives express a blind faith in the invisible hand theory of Adam Smith and the idea that companies should be allowed to regulate themselves. As Mr. Wallison states, predatory lending is a “disgraceful practice that should be stamped out.”
He also points out that irresponsible lending, even when it doesn’t fall under a formal definition of “predatory lending,” should also be reined in. Responsible lending rules should apply to institutions regardless of whether they are private or government.
Stated otherwise, FHA, Fannie Mae, Freddie Mac, and Wall Street should be held to the same lending standard. Again, agreement.
Second, we agree that the litmus test for whether certain products should be allowed in the markets is not whether they are profitable for corporations that sell them but rather whether they are safe and reliable for their customers.
Third, Mr. Wallison and I agree that both downpayment and credit history are important. However, I believe that the probability of a loan failing does not depend on those factors in isolation.
Quality underwriting takes into account the complex interactions of many risk factors involved in originating a loan. Loan product, verification of borrower application information, interest rate, repayment terms, income, assets, debt outstanding, employment history, and other factors are at least as important.
What’s more, overreliance on individual factors such as high down payment can unnecessarily bar millions of families from mortgage credit due to a lack of wealth rather than their ability or willingness to repay a loan.
For these reasons, financial firms must be allowed some flexibility to develop responsible loan products to meet the needs of a diverse American population. Stated otherwise, and as most conservatives would likely agree, over-regulation of the markets can be as unhealthy as under-regulation.
Mr. Wallison also expresses concerns about the losses at FHA. But there are lots of ways to reduce loan losses without resulting to the blunt instrument of high downpayments. Mr. Wallison’s own American Enterprise Institute colleague, Mr. Ed Pinto, has noted that losses on FHA loans could potentially be reduced through a host of procedural improvements related to the manner in which FHA underwrites loans.
Mr. Wallison and I will continue to disagree about the roles of FHA and Fannie Mae and Freddie Mac in the collapse of the housing market. Mr. Wallison argues that FHA’s reckless behavior was a major contributor. But FHA’s share of the mortgage market at the height of the housing bubble was less than three percent of the market, suggesting it is simply not possible for the FHA to have been a major contributor to 2007 housing market collapse.
The losses at FHA are coming largely from loans insured after the crisis began, at the time when the FHA was ramping up its business to compensate for the virtual collapse of the private loan market; a disproportionate portion of these losses stemmed from the seller-funded loan program that ended in 2009.
Similarly, while Fannie Mae and Freddie Mac experienced losses as a result of purchasing bonds from, Wall Street that were backed by subprime loans (and I agree with Mr. Wallison that Fannie and Freddie should not have been allowed to purchase these bonds any more than Wall Street should have been permitted to securitize them), they were hardly the leading institutions that drove the housing market’s collapse.
Wall Street’s securitizations experienced a failure rate six times greater than loans securitized by the GSEs. Even the most risky loans purchased by the GSEs had a failure rate of about 11 percent relative to the subprime loan failure rate of nearly 30%.
This exchange of views has been productive. If conservatives and progressives exchange ideas and perspectives respectfully, we could together design a housing finance system that serves all Americans equitably and in a safe and responsible manner.
Jim Carr is a Senior Fellow with the Center for American Progress and Distinguished Fellow with the Opportunity Agenda.
