Fed’s Powell: Now Is ‘Last Best Chance’ for Housing Finance Reform

With the housing market having recovered and memories of the financial crisis growing distant, Federal Reserve Governor Jerome Powell said today that “the next few years may present our last best chance to finish” critical reforms of housing finance, particularly regarding the secondary market and the role of housing GSEs Fannie Mae and Freddie Mac. If Congress does not enact reforms, Powell added, “we are at risk of settling for the status quo — a government-dominated mortgage market with insufficient private capital to protect taxpayers and insufficient competition to drive innovation.”

Powell noted that it is “ironic” that housing finance remains the last major policy area untouched by major post-crisis reforms, especially given the bursting housing bubble’s role as “an essential proximate cause of the crisis.” He said that “the most obvious and direct step forward” would be to require “ample” private capital to support housing finance and to prevent bailouts of housing finance companies in distress.

Other principles Powell laid out for housing finance reform include an explicit government guarantee applying only to securities, not to institutions, after a “significant stack” of private capital is wiped out; greater private-sector competition; and use of existing infrastructure to the extent possible. Powell also expressed concern that “the current system [may be]too rigid,” citing a recent American Bankers Association survey showing that banks are originating fewer and fewer non-Qualified Mortgages.