CAPping Off Mortgage Myopia

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The Center for American Progress (CAP), about which Time magazine recently said that there is “no other group in Washington with more influence at this moment in history,” weighed in on the mortgage crisis on March 16th. The liberal non-profit group released a report entitled “Principles to Guide Development and Regulation of a Renewed Mortgage Finance System.” The report can be expected to find its way into the hands of many key political players as efforts to repair the nation’s finances continue, with the housing sector near the center of the controversy.

According to the report, “The first goal of a mortgage finance system must be to provide sufficient credit for the development and purchase of single family and multifamily units adequate to meet the housing needs of the country.” In other words, in order for the mortgage system to work properly, the fundamental requirement is to have access to credit and liquidity. In order to realize this goal, CAP identified 4 bench-marks that the country must achieve:

-Strong primary lending facilities
-Well-functioning secondary markets
-Careful but creative innovation
-Adequate access to credit for all appropriate forms of housing

The next step is to ensure that the access to credit and liquidity is consistent. Once credit and liquidity are available, a system of risk management and oversight must be established. According to the report, “A vital component of a stable and successful mortgage finance system is ensuring that credit risk is appropriately measured, priced, distributed and overseen. Regulation of credit risk should be comprehensive and robust, covering all aspects of the mortgage markets, including the secondary markets.”

The CAP report also stressed an emphasis on standardization within the housing market. The report points out that the standardization of mortgages offers simplicity and comparability for consumers and certainty for investors. “Standardization provides benefits to consumers and investors, helps ensure the safety and soundness of financial institutions and improves the transparency and liquidity of housing finance.”

Another key to the recovery of the mortgage finance system is transparency and accountability. Michael S. Barr, Counselor to the Director of the National Economic Council at the White House and former CAP senior fellow, spoke at the introduction to CAP’s report and emphasized this point. He said, “We need to have key standards of public market integrity. We need to restore integrity and trust to the financial system—basic human values that have been driven from our financial system and need to be brought back.”

Beyond making credit and liquidity available again, and creating a system wherein mortgages are more reliably managed, CAP highlighted the need for built-in systemic stability. “Better measures of gauging counterparty and systemic risk must be adopted and consideration must be given to other mechanisms for containing and minimizing risk,” the report read.

The final two keys to mortgage finance reform are to ensure better costumer protection, which encourages better outcomes for costumers by default, and the opportunity for “equitable and fair access to credit for consumers and communities.” Barr summed up the consensus of CAP’s report with this sentiment: “We need a financial system that works in up times and in down times.” Doubtless this is true, and with CAP’s influence on the hill right now, we may now have a blueprint for restoring confidence in the housing market. The implementation of these steps is an entirely different, and more essential, challenge.

And do we have a blueprint that will work? The undertakings that are already in motion are questionable. Throwing the government bailouts further into question is an explanation of the cause of the financial crisis by the late Christopher T. Warden, at the time of his untimely death a journalism professor at Troy University in Alabama. “The real answer to a business in trouble is not federal tax funds, but a change in the law that led to the problem in the first place,” he said. “That failure to change the law stems from—you guessed it—a lack of economic understanding on the part of lawmakers and the media.” Add “certain think tanks” to that list.

Warden had previously worked at Investor’s Business Daily, where he was editorial page editor. Past policies that may have caused the current crisis received no mention at CAP. The first, Warden points out, is the Community Reinvestment Act(CRA), passed in 1977, which “required lenders to make loans to ‘economically underserved’ areas.” This meant that poorer borrowers no longer had to abide by the same standards in receiving loans.

On top of that were the policies of President Clinton and the head of Fannie Mae, Franklin Raines. “President Clinton aggravated the problem when he made it policy to increase home ownership,” transforming Fannie Mae into a risk-taking enterprise.

Warden, whose time at IBD began with a stint as a reporter on the Washington beat, concludes that the Democratic Congress “did nothing to change the Community Reinvestment ACT, preferring instead to toss money at the problem.” Unless CAP can convince the Democratic Congress to reconsider its entire approach to mortgage finance reform (and anyone who knows CAP also knows that this is will not happen), CAP’s suggestions will continue to encourage lenders to make loans destined to fail.

Daniel Allen is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.