September 5, 2012
Are we better off than we were four years ago? “Absolutely” chirps Obama’s hallelujah chorus. “No way” say struggling homeowners, and they have a point. Despite tens of billions of dollars pledged and a veritable barrage of government programs, more than one in five borrowers hold underwater mortgages, just as they did when Obama took office.
In 2009, President Obama launched the first of myriad programs designed to keep people in their homes-- HAMP a foreclosure prevention program and HARP for refinancing existing mortgages. Obama’s promise: “We will help between 7 and 9 million families restructure or refinance their mortgages so they can afford -- avoid foreclosure.”
HAMP, which aimed to reduce hard-hit borrowers’ mortgage rates to no more than 31 percent of their monthly income, was a flop from the start. Documentation issues and overly-narrow qualification requirements meant that instead of helping 4 million homeowners, after three years, the program had assisted less than one million.
HARP, which was supposed to help 5 million homeowners in distress, also fell short of the president’s lofty goals. By the end of last year, fewer than two million people had taken advantage of that effort, and less than $3 billion of a pledged $50 billion had been spent. Other programs followed, with similarly unimpressive results. Indeed, some argue that the cluster bomb of ineffectual but always promising solutions from Uncle Sam actually slowed progress, as troubled owners resisted selling, hoping that a bail-out was just around the corner. Last fall, Zachary Goldfarb writing in the Washington Post, claimed, “Administration programs have permanently reduced the debt of just one tenth of one percent of underwater borrowers.”
In fairness, the housing collapse was monumental. Fixing it was like trying to rebuild a sand castle with the tide coming in. Banks had opened the spigots wide during the housing boom; faced with demands that they build capital and confronting the real risk of further deterioration in home prices, they simply shut down credit.
Mortgage modifications were complicated by the securitization of millions of mortgages as well as legal problems that eventually shut down foreclosures. While this latter speed bump gave borrowers some time, it also thrust even more uncertainty into a market rattled by changing rules. Causing even more confusion was the passage of Dodd-Frank, which led to lots of new regulations, some of which are not yet written. The Consumer Financial Protection Bureau, for instance, has yet to define what constitutes a “fair” mortgage.
Still, President Obama’s response to housing reflects the failures of this administration, both large and small. This White House has been overly enthusiastic about federal fixes and agnostic, at best, about market-driven responses. Not only were the programs launched to stem the tsunami of failed mortgages too small, they ignored the functioning of the market place.
At the same time, President Obama whiffed on the opportunity to initiate a serious national conversation about housing policy. (Seriously, if not now, when?) Congress, through our tax policy and through the mandates given Freddie Mac and Fannie Mae, has encouraged overinvestment in housing for decades. While China has been investing 5 percent of GDP in infrastructure, we poured our resources into housing, spending only 1.5 percent of our income on roads and tunnels. Look how that turned out. With bipartisan appetite for tax reform, housing policy should be on the front burner.
But, it is not. Ironically, though homebuilding is one of the few remaining green shoots, the Obama camp hardly mentions it. The truth is that housing is now, finally, rebounding. With a substantial assist from the Federal Reserve, the natural drivers of housing demand – family formations and population growth, combined with uber-low mortgage rates and sinking prices -- have brought buyers and sellers closer together.
The National Association of Realtors announced last May that its quarterly Housing Affordability Index rose to a record high of 205.9 in the January to March quarter, breaking 200 for the first time since recordkeeping began in 1970. Not surprisingly, purchasing began to turn higher. Last week the National Association of Realtors reported that its Pending Home Sales Index for July increased 2.4 percent to 101.7 - the highest level since April 2010 and the 15th straight month of gains.
This tally of buyers who have signed contracts to purchase previously owned homes, was up 12 percent over last year’s level. That’s not the only good news. Last week also brought a positive report from S&P/Case-Shiller, noting that housing prices nationwide were up 1.2 percent in the second quarter over last year and ahead a hefty 6.9 percent from the first quarter. Permits, sales volumes – all point to progress.
These signs of improvement may be one reason why Edward DeMarco, head of the Federal Housing Finance Agency, earlier this summer rebuffed Treasury Secretary Tim Geithner’s push for more mortgage modifications on loans backed by Fannie Mae and Freddie Mac. Mr. DeMarco is either standing up for American taxpayers, who are on the hook for billions of dollars invested in the giant housing agencies, or he understands the damage to the healing process that another federal broadside might create.
We should do everything possible to nurture the recovery in housing. The Federal Reserve recently reported that the median family’s net worth dropped by almost 40 percent between 2007 and 2010. That was the biggest decline in modern history and was “driven most strongly by a broad collapse in house prices” according to the Fed. The recovery will likely not gather steam until housing reaches a visible bottom and turns up. What should we do? Precisely nothing. Then, maybe four years from now, homeowners can join the chorus.