In the last six months, President Obama has rolled out a series of proposals to address America’s still ailing housing markets. Elevating housing on the White House priority list is a welcome if belated development—one PPI called for in a major conference on new housing solutions we cosponsored last fall.
To assess the administration’s new proposals, we should start by clearly defining the central problem that must be solved. Contrary to media accounts, it’s not foreclosures, abandoned homes or underwater borrowers. These are all symptoms of a deeper malady: declining home prices. So the question we should ask is whether the President’s new flurry of ideas will move the needle on prices.
The answer is: some but probably not enough. For starters, they don’t do enough to help homeowners dig out from an avalanche of negative equity. For another, there’s no prescription here for stimulating more demand for housing. Nonetheless, the administration’s new proposals would ease some of the strain on distressed homeowners, and they deserve support.
Here’s a rundown of the President’s five proposals:
1. The $25 billion foreclosure-abuse settlement reached with banks in February.
Last month, the administration brokered a landmark settlement between the largest mortgage providers and a coalition of states’ Attorney Generals. This is a huge election year win for Obama. The settlement will provide some restitution to about 750,000 homeowners who were “robo-signed” into foreclosure and who will receive $2,000 each to ease the pain. Another one million homeowners will get a chance for the principal on their loans to be reduced.
While the numbers involved are too small to move stricken housing markets, the settlement will probably prevent some unnecessary foreclosures. On the other side, the banks have paid up and put this episode behind them, which we hope will shift their focus back to much needed lending.
2. Broader Refinancing Opportunities.
Obama issued an order to cut refinancing fees for any loan insured by the Federal Housing Administration, and The Federal Housing Finance Agency (FHFA) announced a set of changes to help a greater number of creditworthy borrowers refinance – particularly those who are underwater on their mortgages.
In a move that not only keeps more families in their homes, but stimulates the economy as well, the administration pushed to allow more homeowners greater access to historically low rates by expanding refinancing opportunities. These historic low rates have been aided by an extremely accommodating monetary policy by the Federal Reserve. This has not only led to low rates on home mortgages, but lower costs on automobile financing, which has spurred record growth of American automobile production, lowered the costs of business investment and generated billions of dollars in consumer credit to further grease the economy. Having flooded the market with liquidity, it would be foolish not to allow as many homeowners as possible to refinance.
The administration’s initial housing initiatives of HAMP and HARP were widely panned as helping far fewer people than the administration promised. Nonetheless, it’s encouraging that some of the largest banks, like Citi, Chase, Wells Fargo, and Ally, are increasing their mortgage lending and participation in these programs, which will broaden their ultimate impact. The only major player in the mortgage market to lag significantly behind was Bank of America.
3. A review of military foreclosures.
Over the past year, reports surfaced about egregious payment collection and foreclosure practices by banks and servicers on loans to military families. With some troops seeing third, fourth and fifth tours of duty in the Middle East, their families struggled during the recession to hold onto their homes. President Obama has unveiled a new agreement with banks to review foreclosures for members of the military from 2006 on. Any veteran whose home has been wrongly foreclosed on since then will receive compensation equal to a minimum of $116,785 plus any home equity lost since the foreclosure.
While the administration is right to champion families of U.S. servicemen and women, the number of households that will be affected is small and this proposal won’t have a big impact on housing markets.
4. A Homeowner Bill of Rights, a streamlined refinancing process and a transition to more rental properties.
The administration proposes to offer refinancing opportunities to homeowners whose mortgages are not owned by Fannie Mae or Freddie Mac, and therefore are not eligible to participate in HAMP and HARP. That seems fair, but it would shift these privately-held loans onto the government’s books, since they’d be using the Federal Housing Authority (FHA) guarantee. This would increase the public’s exposure to foreclosure risk, when what we really need is to bring private capital back into the private marketplace. As an interim measure, however, this idea makes sense.
The “Homeowners Bill of Rights” aims at protecting distressed homeowners from robo-signing and other abusive practices. It’s a reaction to the Mortgage Electronic Registration System (MERS) disaster, where the private clearinghouse mortgage paperwork failed to adequately track loans, precipitating the robo-signing epidemic.
These requirements may be burdensome to some of the largest banks and mortgage lenders. But as long as these corporations control such a large share of the market, that’s a price they’ll have to pay to restore stability and trust.
Much less convincing is the administration’s proposal to convert distressed homes to rental properties. An increase in renters may help as a “spot” solution in places where there is an investor- friendly market (think university communities). Certainly, in small doses a narrow and targeted release of quality turnkey investment opportunities could prove useful. But dumping rental properties in bulk would mean flooding some markets with inventory that will only eventually be sold at discounted prices.
This, in turn, would put additional downward pressure onto already depressed markets like Las Vegas, and continue to prevent current homeowners from selling and new homebuyers from entering the market. Furthermore, if conversion to rental becomes too widespread, you’ll eventually see pushback from local communities that do not want to diminish homeownership rates (and property tax collections) in their communities.
5. Mortgage forbearance for jobless buyers.
The Obama administration wants to extend the forbearance period that unemployed borrowers could receive on their mortgages to 12 months, up from four. (It’s only three months in HAMP). This would grant homeowners who lose their jobs a longer grace period for not paying the monthly mortgage. Getting more workers back into full-time work and paying their mortgage is a win-win for the U.S. economy.
While the upcoming elections will likely make any bolder actions impossible, these proposals are still a significant step in the right direction.
Photo Credit: Jekemp
