Housing Finance Reform

This is why the National Association of Home Builders (NAHB) has announced new framework for reforming the housing finance system.

"Our plan seeks to overhaul the housing finance system to ensure that housing credit is available and affordable in the future and is delivered through a competitive, efficient, sound, safe and stable system," said NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla.

Largely this reform plan is a departure from government run mortgage giants Freddie Mac and Fannie Mae. It focuses, instead, on private mortgage companies that would be governed by prudent underwriting standards as well as adequate oversight and regulation. Freddie and Fannie would remain continue operating until the new system was fully in place.

Loose standards for underwriting were one of the main culprits in the subprime mortgage meltdown that precipitated the housing bust. Predatory lending took advantage of a booming economy and promised buyers "more for their dollar." Many people bought homes that were too expensive with zero money down. They soon saw their low monthly mortgage payments skyrocket as rates rose.

What role would the government have under this new NAHB plan? They would be the guarantors of privately funded insurance. This would work similarly to how the FDIC functions for banks and savings accounts across the nation. This guarantee would mean that mortgage originators would pay premiums to capitalize the insurance fund, which would cover losses and ensure full payment to investors.

"The intent is for the government to be in a secondary position and to be the insurer of last resort in order to reduce the risk to taxpayers," said Rutenberg.

In order to set this new housing finance plan into action, "the system must include private, federal and state sources of housing capital; offer a reasonable menu of sound mortgage products for both single-family and multifamily housing that is governed by prudent underwriting standards and adequate oversight and regulation; and provide a federal backstop to ensure that 30-year, fixed-rate mortgages are available at reasonable interest rates and terms."

According to the NAHB, their housing finance reform blueprint also proposes to: