Obama Should Push Principal Cuts to Help Housing, Cisneros Says

President Barack Obama has failed in his efforts to help the U.S. housing market recover and should focus on cutting the amount troubled homeowners owe, said Henry Cisneros, who was secretary of the U.S. Department of Housing and Urban Development under President Bill Clinton.

“It’s clear this has been the poorest part of the administration’s response,” Cisneros, 64, said during an interview at Bloomberg’s Los Angeles office yesterday. “The whole country is suffering through the fact that the housing sector is not up and running.”

About 6.4 million U.S. mortgages are delinquent, and the average homeowner with a foreclosure notice hasn’t made a payment in 611 days, Lender Processing Services Inc. reported yesterday. With real estate prices about one-third below the 2006 peak, almost one in four homeowners with a mortgage are “underwater,” or owe more than their property is worth, according to CoreLogic Inc.

Obama, in a speech presenting a $447 billion job-growth plan last month, said he was seeking to boost housing through proposals such as giving more homeowners access to “interest rates that are now near 4 percent -- a step that can put more than $2,000 a year in a family’s pocket and give a lift to an economy still burdened by the drop in housing prices.”

A better way of putting money in homeowners’ pockets and reducing foreclosures would be for Obama to pressure lenders to lower the principal owed on mortgages, Cisneros said. The administration probably didn’t support that type of plan when Obama took office in January 2009 because banks were weak and the Treasury Department took the lead in dealing with the credit crisis, he said.

‘Running the Response’

“Treasury was running the response and housing was not top of mind -- the banks were,” Cisneros said in the interview. “And there’s a little bit of a conflict when you’re asking the banks to play the role they needed to play on housing, including some principal forgiveness. It was not the right question to raise with the banks when they were trying to hang on by the skin of their teeth.”

Another program the administration should pursue is encouraging investors to buy foreclosed homes en masse to own and manage as rentals, he said.

“Investors can at least take it out of inventory, so it’s not the competition for the private builders,” Cisneros said. “We need to be doing this on a massive scale -- hundreds of thousands, even millions of units.”

HUD and the Federal Housing Finance Agency, which oversees mortgage-finance companies Fannie Mae and Freddie Mac, have asked investors for proposals to help turn more foreclosures into rentals.

Shrinking the Inventory

With a smaller inventory of foreclosed homes, which typically sell at a discount, builders would be more willing to start construction, adding jobs to the economy, Cisneros said.

“Confidence in the housing markets is off,” he said. “Builders dare not start new production because they’re competing with foreclosed stock at 40 percent off.”

As secretary of HUD from 1993 to 1997, Cisneros advocated programs to boost the U.S. homeownership rate, such as encouraging banks to lend more to Latinos and blacks. The ownership rate peaked at 69.2 percent in 2004 and retreated to 65.9 percent as of June 30, the lowest since 1998.

The housing bubble was fueled by a “witch’s brew” of factors, such as easy credit availability and brokers’ peddling of risky mortgages for high commissions, Cisneros said. That doesn’t negate the concept that homeownership is critical to building a healthy middle class, he said.

“A responsible strategy of increasing homeownership is perfectly legitimate,” Cisneros said.

Former Mayor

Cisneros was mayor of San Antonio from 1981 to 1989. In 1999, he pleaded guilty to a misdemeanor charge of lying about payments he made to a mistress when he was being vetted as a nominee for HUD secretary.

He is now chairman of CityView, a Los Angeles-based real estate investment firm that since 2003 has developed more than $2 billion in projects, including affordable housing. Yesterday, he hosted a press conference at Branford Village in the Los Angeles suburb of Pacoima, a project CityView helped finance.

Sales have closed on 21 of Branford’s 125 homes, built by Montage Development Inc. of Calabasas, California, at starting prices of $260,000. Most were bought by immigrant, first-time homebuyers, Cisneros said.

“The dream of homeownership is alive, particularly among the newer Americans -- folks that are here with a dream and have the ambition of making it to the middle class and have the understanding that buying a home and investing is a better bet than renting forever,” he said in yesterday’s interview.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE