Wall Street should take more of a role in the housing market, a Federal Reserve Governor said on Thursday.
Speaking before a right-wing think tank in Washington, Jerome Powell said the government’s role in the mortgage industry is “unsustainable.”
“Today, the federal government’s role in housing finance is even greater than it was before the crisis,” Powell said in a speech given to the American Enterprise Institute.
“Above all, we need to move to a system that attracts ample amounts of private capital to stand between housing sector credit risk and taxpayers,” he also said. “We should also use market forces to increase competition and help to drive innovation.”
Powell was referring to Fannie Mae and Freddie Mac, so-called Government Sponsored Enterprises (GSE), which endeavor to keep homeownership relatively more affordable by buying and selling mortgages on wholesale markets.
Fannie and Freddie have been wholly-owned by the US government since the 2008 crisis, when the mortgage industry’s meltdown led to a $187.5 billion bailout of the two firms.
By legislation, they’re required to take all profits and hand them over directly to the Treasury. The two GSE’s “have remitted over $270 billion” back to the government, as Powell noted.
Fannie and Freddie have also reduced their direct holdings “to about half of their pre-crisis size,” Powell also said.
But despite the portfolio downsizing and tighter industry-wide rules on mortgage-underwriting, and in spite of the performance of Fannie and Freddie since 2008, Powell said that privatization is needed to minimize “taxpayer liability and systemic risk.”
“The most obvious and direct step forward would be to require ample amounts of private capital to support housing finance activities, as we do in the banking system,” the Fed governor said. “We should also strive for a system that can continue to function even in the event of a default of any firm.”
With respect to “private capital” supports in the banking sector, Powell was referring to enhanced reserve levels held by the largest American banks, as post-crisis reforms have mandated.
“Common equity capital held by the eight US global systemically important banks has more than doubled to $825 billion from about $300 billion before the crisis,” he said.
The largest banks in the country, however, have also grown substantially since the 2008 financial meltdown.
In 2006, the largest four banks controlled only 28.9 percent of industry assets, which totaled about $9.4 trillion. By the end of 2015, the big four share of control rose to more than 40 percent of the entire banking sector, which itself had ballooned to more than $15 trillion in assets.
And while the housing market has stabilized since the 2008 crisis, by one measure, it is substantially weaker than it has been in decades. Only 63.4 percent of Americans owned homes in 2016, the lowest rate of homeownership since 1967.
Homeownership has been the principle way through which the majority of Americans have accumulated wealth over the past few decades. It has been aided by government involvement in the mortgage market—something Powell was ready to admit on Thursday.
“Although private capital must surely be part of the reform effort, there may be limits to the amount of risk that we can credibly expect the private sector to insure,” he said.
