More Ambitious Housing Plan Could Unlock the U.S. Economy: View
The U.S. housing market “hasn’t bottomed out as quickly as we expected,” President Barack Obama pronounced earlier this month. What he really meant was that housing has been like an anchor dragging down the economy.
Normally at this stage of a recovery, home sales and new construction are engines of economic growth and job creation. Obama has resisted more ambitious programs in the belief that housing would recover once the overall economy did. Now it appears he must do the reverse: Lift housing in order to boost the economy.
It’s not possible to save everyone at risk of losing a home. Instead, the goal should be to clear out the oversupply, which the U.S. Treasury Department estimates at about 3.9 million homes, so the market will bottom out -- and then begin its long climb back. The administration should also help borrowers reduce the principal on their mortgages. This would be aimed at the 11 million households, more than 20 percent of the U.S. total, whose mortgages are greater than the value of their homes, or “underwater.” If they default, they will overwhelm an already dysfunctional foreclosure system, drag down prices of neighboring houses, and set back a fragile recovery.
Home prices are not rebounding. Today’s S&P/Case-Shiller index shows that prices fell 4.5 percent from May 2010, the most in 18 months. They have declined 33 percent since their July 2006 peak in the 20 largest U.S. cities. Such a slump is on the scale of the Great Depression. The number of foreclosures is down, but that’s probably a false lull brought on by the robo-signing scandal, in which banks used faulty paperwork to hasten repossessions. Now in the midst of settlement negotiations with state attorneys general, banks are being careful not to make waves, putting defaulted borrowers in limbo.
For more than three years, housing has failed to respond to Obama’s modest revival efforts. The Treasury’s Home Affordable Modification Program has permanently modified about 730,000 mortgages, far short of the goal of at least 3 million. Many borrowers don’t qualify because their total debt relative to income would still be too high even after monthly mortgage payments are reduced. A first-time homebuyer tax credit produced an uptick in demand, but that disappeared as soon as the credit expired. A pilot federal program to lower mortgage principal has run into resistance from banks and loan servicers; so far it has helped about 5,000 homeowners. More recently, Obama has directed the Federal Housing Administration, which finances home loans for lower-income Americans, to let unemployed borrowers skip as many as 12 monthly payments.
The administration has had solid reasons not to be more interventionist. Helping every distressed homeowner would be prohibitively expensive. Aiding borrowers who knowingly took on more debt than they could afford would set a bad example for those who have been more prudent. About one in five homeowners default on their loans even after payments are reduced. And the securities into which most mortgages have been bundled have legal clauses that make principal write downs difficult.
These are high hurdles. But the administration could take steps now, including using Fannie Mae and Freddie Mac, the taxpayer-owned mortgage-finance companies, to greater effect. They have received $130 billion in taxpayer support, after all, and together they hold or guarantee about 90 percent of all mortgages. Treasury could direct them to help underwater borrowers who are paying their mortgage and would probably stay current if the principal were reduced. In return, homeowners who benefit from a principal write-down and later sell should give up a portion of any profits, an approach called shared appreciation.
The settlement negotiations between large banks and the states could also help, especially if the result is a speedier, and legal, foreclosure process with a well-endowed settlement fund that states could tap to write down principal amounts for at-risk borrowers.
The administration should urge Fannie and Freddie to recognize losses on the millions of troubled and defaulted loans sitting on their balance sheets. One approach would be to sell foreclosed properties to institutional investors. The two companies would then rent some of those foreclosed homes, both to ease the property oversupply and keep a lid on rental prices. (Rents are rising because of higher demand for rental units, now that many families don’t qualify for a mortgage or don’t want one.)
The mortgage-finance companies’ regulator, the Federal Housing Finance Agency, would have to approve most of these changes, and Congress may need to get involved. The FHFA now forbids principal reductions on mortgages that Fannie and Freddie own, not wanting to condone anything that would reduce the value of their assets. But that’s like saving a burning building while letting its contents go up in smoke.
By using Fannie and Freddie to help fix the housing market, the administration could strengthen the companies, too. In the long run, it may cost taxpayers less, and it would take a big weight off the recovery.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at firstname.lastname@example.org.