Reforming the housing-finance system is a complicated, long-term proposition. Even scholars who call for privatizing Fannie and Freddie, such as the American Enterprise Institute’s Peter Wallison, say that privatization should occur gradually to avoid injecting more chaos into the market. Many analysts say that removing a government guarantee would do nothing to stimulate the housing market—and that it could slow the market down as lenders price in higher risk and raise the price of mortgages.
Some conservative economists have urged Republicans to think more boldly. Columbia University’s Glenn Hubbard—who chaired the Council of Economic Advisers under President George W. Bush—and Christopher Mayer want to allow Fannie and Freddie to refinance as many as 30 million mortgages into cheaper rates, a strategy that they estimate could save borrowers about $2,000 a year on their loans. (Hubbard is advising Romney.) Harvard University’s Martin Feldstein, a CEA chairman under President Reagan, has advocated reducing the mortgage debt of some 11 million underwater borrowers to 110 percent of each home’s value. Feldstein says that such action would cost $350 billion and would stop the fall in home prices.
President Obama, meanwhile, has given GOP candidates a huge opening on housing by pursuing a suite of anemic policies since taking office. For his first two years, his administration insisted (like Perry today) that reviving the economy would resuscitate the housing market. This year, the president acknowledged that the market needs more help, but he has not tried aggressively to bolster falling prices. The administration’s modest early efforts to modify loans—the Home Affordable Modification Program and the Home Affordable Refinance Program—have each affected fewer than a million borrowers, which is less than a quarter of those initially targeted. Recently discussed efforts to extend HARP are already being panned as unlikely to provide much additional relief. Some Democrats are now trying to distance themselves from Obama because of his poor track record on housing.
Why have Republicans resisted filling such an obvious void? Blame entrenched ideological and financial interests. Intervening in the market to drive down debt levels—as Hubbard and others suggest—would turn off archconservatives; one of the tea party’s seminal early moments, after all, was CNBC commentator Rick Santelli’s rant against an Obama plan to reduce mortgages for some underwater borrowers. Even disentangling government from the mortgage-guarantee business risks alienating traditionally heavy GOP donors in the real-estate, home-builder, and mortgage-banking industries. On the other hand, primary voters are more than ready to bash the “Ownership Society” initiatives championed by President Bush.
“There are not a lot of political wins” in housing policy during a GOP primary, says Mark Calabria, a director of financial-regulation studies with the Cato Institute and a former aide to the Senate Banking Committee. “The smart thing for the Republicans to do right now is stay out of it. The most effective thing anyone can do is to speed up the foreclosure process, but I have a hard time seeing anybody running for office calling for that. And you are not going to see any Republican roll out any homeowner-bailout program until after the primaries.”
Theoretically, that silence could give congressional Republicans space to cut a deal with Democrats that addresses housing and stokes the recovery—without undercutting a major talking point of the GOP’s presidential field. One such deal could include major cash assistance to underwater homeowners who didn’t borrow at subprime rates, as Feldstein suggests, along with accelerated foreclosure proceedings for distressed borrowers who will never be able to afford the homes they live in.
But in the real world, no one expects Obama and Congress to do anything about housing any time soon, and that inaction only raises the ante for GOP hopefuls. For a Republican candidate trying to break out of the pack—in other words, any of them—an aggressive housing policy could be a good move. The framing is surprisingly simple: “I don’t like this any more than you do, but if we don’t make homeowners whole again, we’re not going to create a lot of jobs for a long time.” The candidate could use the housing plan as a model to demonstrate how he or she would transcend rhetoric and bring a fractured country back together.
If nothing else, it could play well in Nevada.
This article appears in the Oct. 22, 2011, edition of National Journal.