As part of a pre-State of the Union victory lap on the economy, President Obama visited Phoenix yesterday, site of one of the worst crashes during the foreclosure crisis. He came to tout his housing policies, and announce a new venture: saving middle-class homebuyers money by reducing the cost of insuring their mortgage loans.
The move fits with a theory about the housing market that if only banks can be induced to lend more freely, the market will take off. Not only is this theory an incorrect read on why housing has trailed the recovery, it comes from an administration that continues to mislead about its housing policies, and has chosen the wrong path at virtually every turn.
Obama announced Thursday that the Federal Housing Administration (FHA) is reducing premiums on mortgage insurance by half a percentage point. The FHA does not make loans; it provides insurance on mortgages, typically ones to lower-income borrowers, with down payments as small as 3.5 percent. FHA uses premium fees from borrowers to pay back lenders if the loans default.
During the crisis, FHA increased its insurance portfolio significantly, as lenders flocked to use the program when the market seized up. An inordinate number of those loans — many suffused with fraud — defaulted, and in 2013, FHA drew down $1.7 billion from the Treasury Department for the first time in its history. It has returned to good fiscal health recently.
The agency ratcheted up premium fees to replenish its balance sheet. The announcement by President Obama, which liberal housing groups and their allies in Congress have urged, would bring those fees down from 1.35 percent to 0.85 percent, still above the historical level. In addition, the White House said it would press FHA to “cut red tape” and “clarify lending standards” on loans the agency insures, a mirror of the moves by Fannie Mae and Freddie Mac to loosen lending restrictions to those without perfect credit.
The idea here is that lower-income borrowers would gladly buy homes if banks and the government would simply open the credit spigot and lend to them.
The problem is that increasing mortgage lending to below-prime borrowers got us into the housing mess in the first place, and even putting that aside, you cannot actually chalk up faltering home sales to a tight supply of mortgages. Redfin’s Real-Time Buyer Survey shows that only 2 percent of buyers said “can’t get a loan” was their biggest obstacle to purchasing. The majority cited “rising home prices” and “quality of inventory,” meaning the lack of decent homes in the buyer’s price range.
That’s the issue in a nutshell: homes are too expensive, and people don’t have the money to afford them. A Fannie Mae survey similarly showed that, while consumers are more confident, they’re not confident about sinking money into homebuying. The market remains dominated by the comfortably wealthy: all-cash sales, though down from the peak, are still elevated, at 35 percent of all purchases. As I wrote in May, we have two housing markets: one for the rich and one for the rest.
The FHA announcement attacks the affordability question in an exceedingly trivial way. In a fact sheet, the White House asserts that the reduction in annual premiums will save the typical homeowner with an FHA loan $900 a year. That’s about $75 a month, on a mortgage payment that is $1,061 for the average loan. President Obama said yesterday “don’t buy something you can’t afford,” but if $75 is really the difference between making payments and foregoing a loan, you probably shouldn’t get a mortgage in the first place.
Current FHA borrowers would have to refinance to get the new premium rates. That means paying closing costs that wipe out much of the benefit, in the process handing windfall profits to the lenders. Plus, the announcement triggered increases on mortgage securities tied to FHA loans, which will likely mean higher interest rates for FHA borrowers, canceling out whatever miniscule benefit.
Mortgage interest rates, incidentally, are at their lowest point in over a year, which has a much bigger impact on monthly payments than FHA premiums. And yet nobody’s buying. Stagnant wages and prices well above affordable levels matter much more. You can either put people into risky mortgages (subprime loans were called “affordability products” way back when) or create a tight enough labor market that ordinary Americans see a salary increase. Other than that, housing will stay relatively flat.
Meanwhile, it’s hard for the White House to maintain credibility on housing policy after six years of erroneous decisions. And that fact sheet announcing the FHA change stretches the truth considerably. It says, for example, that the administration’s efforts have “helped over 8 million borrowers, more than twice the number of foreclosure completions” since taking office in 2009.
First of all, that undercounts foreclosures, which are estimated to be as high as 5.6 million since the crisis. Next, included in the 8 million are 4.2 million private mortgage modifications, which banks did with their clients without any involvement from the government. Some of those private mods saddled borrowers with higher monthly payments than the status quo.
Not included in the statistics are re-default rates. We don’t know re-default rates for private mods, but they stand at 30 percent for the Obama administration’s signature foreclosure mitigation effort, HAMP, and are as high as 46 percent for the oldest modifications. The administration’s foreclosure relief program still has not even spent one-quarter of what was promised.
Similarly, the administration touts its refinancing program, HARP, when it’s only open to borrowers current on their loans, and is therefore a stimulus and not a housing rescue program. Meanwhile, a study showed this week that HARP’s design allowed lenders to limit competition and charge borrowers above-market interest rates, creating a windfall of at least $1 billion a year for the banks.
- Treasury never sanctioned a single mortgage servicer for documented abuses of borrowers that led to unnecessary evictions.
- While the administration claimed 1 million families would see principal reductions as a result of the National Mortgage Settlement, only 83,000 got one, a 90 percent underperformance.
- Yesterday, Obama claimed $50 billion in “relief” in fraud settlements, but a large part of that involved banks taking credit for things that either had no economic value or things they routinely do in their normal course of business, including making loans.
- Some of the cash payouts were so small, foreclosure victims didn’t bother to deposit the checks.
- And lenders continue to violate federal law, deceive borrowers and kick people out of their homes using false documents, no different than before.
Every administration shades the truth a bit to paint its policies in the best possible light. But this really pushes it. The president’s economic team did little in the face of the greatest destruction in middle-class wealth since the Great Depression, making the calculation to limit losses on financial institutions rather than homeowners. Coming around with the lure of $75 a month isn’t going to make people forget that.
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