Housing finance reform going to take years, experts say

House Republicans have insisted they want to move quickly on reforming the housing finance market. However, Peter Wallison, codirector of AEI’s program on financial policy studies, insisted that any serious reform effort is at least two years away.

“There isn’t a political consensus that would allow this issue to be resolved before the election of 2012, in my view,” he said, noting the “huge difference” of opinion in the House and Senate on the matter, not even beginning to consider the administration’s take.

“We have a couple of years to work this out,” he added.

Laurie Goodman, a senior managing director at Amherst Securities Group LP, agreed that the chance of any major action on housing finance reform this year to be “very, very low.”

And David Ledford, a senior vice president at the National Association of Home Builders, said the fragile state of the current housing market will further impede progress.

“Just the fact that it’s difficult to move forward without having some impact on the current system is going to also slow the process down,” he said.

However, James Lockhart, vice chairman of WL Ross & Co. and former director of the Federal Housing Finance Agency, said the complexity of the issue and the fragility of the market is no reason not to start down that path now.

“We need to start really seriously thinking about it,” he said. “We’re still very much in a fragile state, and that does give people a lot of excuses to not make decisions.”

If Congress does decide to take up the issue soon, AEI’s event also gave a preview of the partisan divide that could emerge. Wallison touted a recent AEI white paper that advocated for the housing finance system to be completely free of government intervention and entirely handled by the private sector. Some House Republicans, including ones that will be intimately involved in the housing finance debate, have advocated for a similar wholesale shift to the private sector.

“It is a very serious problem if we are going to try to develop a system that looks anything like the system we had before,” he said. “We think you can build a housing support system completely on a private vehicle with no governmental support.”

However, David Min, associate director for financial markets policy at the Center for American Progress, said that while interesting, AEI’s proposal “takes us back to the 1930s” and would subject housing to the boom-and-bust cycle of the private sector.

But Wallison maintained that any system with government support requires taxpayers to “bear the brunt of those losses.”

Meanwhile, Goodman and Ledford both advocated for some public-private hybrid system where the government provided some sort of backstop to the housing market, but in a clear way.

“In times of crisis, we’re not going to have a reliable flow of mortgage credit without some kind of government backing,” said Ledford.

Lockhart, who said the housing crisis was caused by a “perfect storm” of events, also called for stricter recourse measures to be applied to homeowners. Putting homeowners’ assets on the line in cases of mortgage defaults would restore “discipline in the market,” he said.