WASHINGTON, D.C. -- As the federal government seeks to stabilize the nation’s capital markets, it has embarked on a sweeping reform of U.S. housing policy and is changing a long-standing emphasis on home ownership to also promote the value of renting, says the Obama administration’s top housing official.

The change in federal policy is expected to bolster the multifamily housing market at a time when apartment development and construction have been jolted by the credit crisis.

“Fundamentally, we need to have a national housing policy that is not just about home ownership. I am absolutely committed, and have already begun to change and to construct a comprehensive broad housing policy that includes rental housing as a valued, important part of what we support at the federal level,” Shaun Donovan, Secretary of Housing and Urban Development (HUD), told the National Association of Real Estate Editors at a conference that began Thursday.

HUD is at the forefront of President Obama’s plan to modernize the regulation of capital markets, particularly since the subprime housing crisis led the nation into its steep economic downturn, says Donovan.

A chief priority is stemming the tide of foreclosures. HUD has pumped $14 billion into nearly 12,000 communities across the country as part of its recovery program, which includes improving public housing and grants to rebuild communities.

The 2010 federal budget proposal includes provisions to protect renters caught in the foreclosure crisis, says Donovan. A little known aspect of the trend is that roughly 40% of those displaced by foreclosures are renters, from families in three-unit Boston brownstones to renters in Brooklyn walkups, the secretary explains.

FHA to be revamped

The Federal Housing Authority (FHA) is targeted for reform, with investment in new technology and changes in financing products and monitoring policies. But the FHA, created by President Franklin Roosevelt 75 years ago during the Great Depression, is playing a critical current role, Donovan says.

It has responded to the demand for financing when banks can’t or won’t help. In 2006, the FHA’s share of the mortgage market was less than 2%, but it has zoomed to nearly 24% today. The administration prefers, however, that private lenders play a bigger role.

The administration has asked Congress for authority to enforce up to $400 billion for FHA insured financing to accommodate the increased volume. That would allow HUD to endorse approximately 2.25 million mortgages in fiscal year 2010.

The administration plans to create a new federal regulator, the Consumer Financial Protection Agency, to shield consumers from unfair and deceptive financial practices. Importantly, the agency will have authority to reform mortgage laws to require more clear and concise lending documents that state the terms of a loan. Mortgage brokers will be required to avoid conflicts of interest and will be paid based on loan performance rather than in a lump sum at closing. Loan originators and sponsors of securitizations will be required to retain 5% of a credit risk.

“Bundling and packaging mortgages to sell on Wall Street not only fed the housing boom, it also led to an erosion of lending standards that deepened the housing bust,” says Donovan. Under the new plan, brokers and loan originators will have a vested interest in the performance of the loans they make – more skin in the game.

Feds hinder affordable housing?

Donovan, who was previously commissioner of the New York City Department of Housing Preservation, provided a decidedly unflattering view of the federal government’s traditional approach to local affordable multifamily housing.

“One of the things I learned at the local level was that often the federal government stands in the way of creating affordable rental housing rather than facilitating it.”

For instance, FHA multifamily insurance doesn’t work well for mixed-use urban redevelopment, it works better with suburban greenfield projects, which limits its usefulness, Donovan says. He also notes that federal funding sources are too complex.

“I’ve worked on multifamily transactions where you have more sources of funds than units in the building. That’s not going to be a particularly cost effective way to produce rental housing.”

Although Donovan earlier served as deputy assistant secretary for multifamily housing at HUD, overseeing privately owned multifamily housing, when he ran the New York City agency, the federal government was not considered a viable resource for information on affordable apartment production.

“We would frankly never have thought of coming to HUD for leadership or guidance on what other places were doing around the country. That is going to change.”

In its 2010 budget, HUD has allocated $150 million for a new office of sustainable communities to join land use planning, zoning resources and local transportation policy in an effort to lower housing and transportation costs. The idea is to fund projects that generate local rental housing.

The reforms affecting housing policy and lending are far-reaching, Donovan notes. “We need to take steps to ensure the kind of behavior that got us into this situation never happens again.”