A second-term president may be just the person to tackle America's housing problems.
When President Obama first came into office, home prices were crashing, foreclosures were soaring and the previous Bush administration had just initiated the bailout of Fannie Mae and Freddie Mac, the government-backed entities that agree to repay mortgages if the original borrower defaults.
With the market in shambles in 2008, the Obama administration pursued a tentative housing policy, for the most part avoiding big moves that might have further weakened the housing market or banks. Eventually, there were some bolder initiatives, like the national mortgage settlement with big banks as well as the Treasury Department's later aid programs for homeowners.
But as President Obama's first administration comes to an end, the government is still deeply embedded in the mortgage market. In the third quarter, various government entities backstopped 92 percent of all new residenti al mortgages, according to Inside Mortgage Finance, a publication that focuses on the home loan industry.
Mr. Obama's economic team has consistently said it wants the housing market to work without significant government support. But it has taken few actual steps to advance that idea.
“I think Obama is absolutely committed to reducing the government's role,†said Thomas Lawler, a former chief economist at Fannie Mae and founder of Lawler Economic and Housing Consulting, an industry analysis firm. “But no one's yet found a format to do that.â€
Housing policy is hard to tackle because so many people have benefited from the status quo. The entire real estate system - the banks, the agents, the home buyers - all depend on a market that provides fixed-rate, 30-year mortgages that can be easily refinanced when interest rates drop. That sort of loan is rare outside of the United States. And any effort to overhaul housing and the mortgage market could eventu ally reduce the amount of such mortgages in the country, angering many and creating a political firestorm.
In other words, the best person to fundamentally change how housing works may be a president who won't be running for office again.
Most immediately, the housing market has to be strong enough to deal with a government pullback. Some analysts think it's ready. “I think the housing recovery is far enough along that they can start winding down Fannie and Freddie,†said Phillip L. Swagel at the University of Maryland's School of Public Policy, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.
The administration can take smaller steps first. Mr. Lawler, the housing economist, thinks the government could start to reduce the maximum amount that it will guarantee for Fannie and Freddie loans. In some areas, like parts of the Northeast and California, it is as high as $625,000. Before the financial crisis, it was essentially capped at $417,000.
The big question is whether the private sector - banks and investors that buy bonds backed with mortgages - will pick up the slack when the government eases out of the market. If they don't, the supply of mortgages could fall and house prices could weaken.
Banks say their appetite depends on how new rules for mortgages turn out. In setting such regulations, some tough choices have to be made.
The new rules will effectively map the riskiness of various types of mortgages. In determining that, regulators will look at the features of the loans and the borrowers income. Banks say they are unlikely to hold loans deemed risky, and their lobbyists are pressing for legal protection on the safer ones, called qualified mortgages.
The temptation will be to make the definition of what constitutes a qualified mortgage as broad as possible, to ensure that the banks lend to a wide range of borrowers. But regulators concerned w ith the health of the banks won't want a system that incentivizes institutions to make potentially risky loans.
One set of qualified mortgage regulations, being written by Consumer Financial Protection Bureau, could be finalized as early as January. Other regulators like the Federal Reserve are expected to take longer in finalizing their mortgage rules. Resolving the conflict between mortgage availability and bank strength may ultimately depend the person who replaces Timothy F. Geithner as Treasury secretary. Mr. Geithner is stepping down at the end of Mr. Obama's first term.
The Obama administration faces other daunting decisions.
One is how to deal with the considerable number of troubled mortgages still in the financial system. Banks might be reluctant to make new loans until they have a better idea of the ultimate amount of losses on the old loans. “If you don't ever deal with these problems, you may never get to where you want to go,†said Mr. L awler, the housing economist.
To help tackle that issue, the new administration might decide to make its mortgage relief programs more aggressive. It might even aim for more loan modifications, writing down the value of the mortgages to make them easier to pay. The Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac, has effectively blocked such write-downs on the vast amount of loans those entities have guaranteed.
A new Obama administration may move to change the agency's stance on write-downs, perhaps by replacing its acting director, Edward DeMarco. If that happened, it would be a sign that the White House has a taste for more radical housing actions. The agency declined to comment.
Then there's what to do with the Federal Housing Administration, another government entity that has backstopped a huge amount of mortgages since the financial crisis. The housing administration was set up to focus on lower-income borrowers , and it backs loans that have very low down payments. Its share of the market has grown from where it was before the crisis. The F.H.A. accounted for 13 percent of the market in the third quarter, according to Inside Mortgage Finance.
The new administration has to decide whether it wants the F.H.A. to continue doing as much business. The risk is that a big pull back by the F.H.A. could reduce the availability of mortgages to lower-income borrowers. Banks almost certainly won't want to write loans with minuscule down payments because they're considered riskier.
Ultimately, housing policy comes down to one question: Which borrowers should get the most subsidies?
Right now, the government largesse encompasses a wide swath of borrowers. But most analysts believe government support should be focused on lower-income borrowers.
“We will know that the Obama administration is serious about housing finance reform when it comes up with a proposal for affordab le housing,†said Mr. Swagel, the University of Maryland professor.
