Debate is brewing across the country about what shape our housing finance system should take in the years to come. As consumer advocates, we need to ensure that the system that emerges from these discussions meets the needs of low-wealth people seeking affordable and sustainable housing.
The new housing finance system must support broad access to the products that made home ownership, the primary means of building wealth for many Americans, a reality for communities that otherwise would have been overlooked. It’s worth noting that, from the aftermath of the Great Depression to the beginning of the new millennium, government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac ensured the flow of responsible credit to underserved communities and considerably expanded homeownership opportunities.
As a deregulatory philosophy took hold of Washington in the early 2000s, prudent supervision of the mortgage market broke down. Predatory loan products edged out sustainable ones in low-wealth communities, presaging the foreclosure crisis that destroyed billions of dollars of equity. As private securitizers took on more and more risk, Fannie Mae and Freddie Mac lost sight of their mission and engaged in a destructive race to the bottom.
Clearly, the GSEs were not without flaws, but as we reform housing finance, we must not abandon the ultimate goal of maintaining a flow of credit that assures a diverse housing stock, including sustainable homeownership for low-wealth people and an adequate supply of affordable rental housing.
Solidly underwritten, fixed-rate 30-year mortgages with low down payments have opened the door for low-wealth individuals to become homeowners and build assets for the future. Both the private sector and the government must play a role in ensuring that this product continues to be a viable option for borrowers in low- and moderate-income communities.
Affordable rental housing continues to be a pressing need in low- and moderate-income communities. In particular, smaller buildings tend to serve a large proportion of low- and moderate-income renters, yet they have difficulty accessing traditional mortgage credit. Government support has been crucial to ensure that financing is available for smaller rental buildings and this access must be preserved.
Predatory lending with deceptive and high-cost loan terms triggered the waves of defaults that badly damaged our housing finance system. We must make sure that borrowers have adequate consumer protections against unsustainable loans and that the housing finance industry does not, knowingly or inadvertently, support unscrupulous lending.
As the private sector takes on a larger role in maintaining liquidity in the mortgage market, we must make sure that it doesn't ignore the needs of low-wealth borrowers and economically distressed communities. We need to extend a community reinvestment obligation to private securitizers so that all communities—not just the wealthiest ones—have access to the capital they need for families to build assets and make their neighborhoods stable, attractive places to live.
In its proposal on reforming the housing finance system, the U.S. Department of the Treasury promises that “we will work with Congress to ensure that all communities and families -- including those in rural and economically distressed areas, as well as those that are low- and moderate-income -- have the access to capital needed for sustainable homeownership and a range of rental options.” Consumer and civil rights advocates must hold policymakers to this commitment throughout the decision-making process.