Financial storm centers on housing

WASHINGTON -- With the Bush Administration working around the clock with congressional leaders on the enactment of emergency legislation to implement a rescue plan to extricate the U.S. financial system from its worst crisis since the Great Depression, the NAHB Senior Officers and staff are remaining in close touch with policymakers in Washington.

At the fall meeting this week of the association’s board of directors in San Diego, addressing the turmoil in the financial markets, which reached grave proportions with the bankruptcy of Lehman Brothers on Sept. 15 and the bailout of insurance giant AIG on the following day, is expected to be the overriding concern.

Restoring the nation’s housing market to full health from one of the most difficult cyclical downturns in living memory was already at the top of the agenda as the association prepared to deliberate in California. With the dramatic succession of events over the past several weeks — including the federal takeover of Fannie Mae and Freddie Mac — restoring the housing finance system itself will be a leading topic of discussion among the directors.

Noting that the outcome of negotiations in Washington this week holds profound consequences for the American economy, NAHB President Sandy Dunn promised to lend the association’s expertise wherever it is needed in the difficult period that lies ahead.

In a Sept. 19 statement, NAHB Executive Vice President and CEO Jerry Howard urged the U.S. government to get out in front of the collapse in confidence that has afflicted the financial markets by addressing its origins in the housing industry.

Going to the Root Causes

“Policymakers realize the root causes — falling home prices, mounting foreclosures and a frozen credit market — must be addressed now,” Howard said.

“The plan being developed must get to the heart of the problem to successfully stabilize mortgage markets and home prices and restore confidence in global financial markets,” he said. “Ensuring that credit-worthy home buyers, builders and other small businesses have access to credit is absolutely essential to putting this economy back on track.”

On Friday, Sept. 19, Dunn informed the NAHB Executive Board that Treasury Secretary Henry Paulson, in consultation with the Federal Reserve and the Securities and Exchange Commission, was meeting on Capitol Hill to present a “troubled asset relief program” in which the federal government would purchase problem mortgage loans from current holders through an operation similar to the Homeowners Loan Corporation that was established for a similar purpose in the 1930s.

“The purchased loans ultimately would be re-sold by the government with the intent of minimizing costs to the tax payers,” she said. “Some are labeling the plan an RTC-like operation, but the key difference in the current proposal is that the assets will be purchased from ongoing institutions. RTC disposed of assets from failed or restructured institutions."

Comments from Sec. Paulson “revealed a dramatic shift in focus in the Administration’s approach to addressing the financial system turmoil,” said Dunn. “First, he stated the need to move from a case-by-case approach to more comprehensive action. Second, his statement contained strong language on the need to address the root cause of the problem — illiquid mortgage assets — rather than simply continuing to prop up troubled institutions.”

“As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy,” she quoted Paulson. “What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible home owners.”