As the Obama administration continues to seek out the best route for fixing the housing market – which in turn, should help fix the entire economy – at least one Republican candidate has his own idea.
Rick Santorum, the former Senator from Pennsylvania and recently declared winner of the Iowa primary, seems to think we should just wait it out. In an article from Reuters Thursday, Santorum apparently told a potential primary voter in South Carolina “Markets have to find their bottom. Let the marketplace work and then build from there.”
As Reuters noted, the constituent he spoke with was less than impressed.
While I’ll be the first to concede that the President hasn’t done what has been needed to fix the housing mess, he certainly understands that letting the markets work themselves out is not the answer either.
As we enter what is basically year 5 of continued depreciation in most U.S. real estate markets, there are two conclusions most people have arrived at as ways that will not turn things around:
1) Provide the banks with billions of dollars in bail out money and hope it’s used to successfully modify mortgage payments and help keep people in their homes.
2) Let the markets “work” and wait for the upswing.
Yet, it seems like the second option could be the campaign cry for the Republican Party, as they try to secure Tea Party voters who believe no government is good government.
While I understand the argument against government intervention, let’s be realistic. If we’re happy with the status quo, then fine, let the markets work themselves out and prolong the problem for another decade, if not longer. But if the goal is to stabilize housing and in turn, the economy as a whole, then that will not work – whether you like it or not.
Too many homeowners that did nothing wrong – borrowed responsibly, paid their mortgage on time, etc. – are now caught in the net unleashed by the mortgage meltdown. They can’t sell their homes because the values have dropped too much, leaving owners too far underwater. As more and more people walk away, prices plunge further pulling more and more people in.
As I’ve said in the past, most are casualties of a decimated housing market that they had little or no part in causing.
Last week, I blogged about the report out of the Fed discussing the various problems plaguing the housing market, as well as some possible fixes. While the report debates various ideas, it does share one certainty – something must be done.
In a blog Tuesday on The Washington Post website, Ezra Klein discussed the possibility of President Obama (based on the suggestion of two Columbia University professors) authorize Fannie Mae & Freddie Mac lower the interest rates on millions of mortgages to where there rates currently are – around 4% to 5%.
The idea being the rate cut will act as the equivalent of “a high-powered tax cut” for those who took advantage of it. Further, the study released by the professors concluded, “Empirical evidence suggests that consumers spend a larger portion of permanent increases in income than temporary increases.“ These cuts would be permanent, meaning more money would be infused into the struggling economy.
I’m a little further to the extreme, thinking principle reductions are the only way to go. The point is, those who have followed the housing crisis closely virtually all agree that something must be done. Too many other components of the economy rely on stability in the housing markets and simply put, waiting will delay the overall recovery…
As election season heats up and the President’s opponent is decided on, I’m curious to hear how/if the rhetoric changes. Should the Republican candidate take the same stance as Rick Santorum, they could be in for a rude awaking when they encounter the millions of potential voters on the campaign trail, tied to the housing mess and looking for the fix…
Friday, January 20, 2012
Friday, January 6, 2012
The Federal Reserve & The Housing Crisis…
On Tuesday, Federal Reserve chairman Ben Bernake released a white paper detailing the current conditions and policy considerations of the U.S. housing market. The study, which was released to leaders of the Senate Banking and House Financial Services committee, provided observations from the real estate collapse and mortgage meltdown to date, while offering potential resolutions.
At first read, much of the 25-page document reeks of “no kidding”. Many of the observations are obvious and very 2009. So are some of the proposed fixes.
Still, much of what was written needed to be brought to light, for those who don’t follow this sort of thing closely. Below, I’ve summarized some of the observations and potential fixes…
Highlights from the “Observations”:
• U.S. house prices declined 33% from their 2006 peak.
• More than $7 trillion in home equity was lost.
• The ratio of home equity to disposable personal income has declined to 55% - far below levels seen since this data series began in 1950.
• Currently, 12 million people are underwater on their mortgages.
Further, the report discusses the various hindrances to recovery, such as: difficulty in securing credit/mortgages; servicer issues (efficient processing of files, overwhelmed loss mitigation departments and the frequent financial incentive to foreclose versus homeowner assistance, i.e., short sale, loan modification, etc.); the cost and community impact of foreclosure; and unemployment.
The latter – unemployment – was something I’ve been waiting to see tied to housing in greater detail. As the report states:
“Another issue is the fact that many borrowers have gone delinquent or have defaulted because of income loss resulting from unemployment or other presumably temporary factors, which impairs their ability to meet previously affordable payment obligations. The basic HAMP modifications focus on longer-term payment reduction to a level that can be supported by the borrower’s income at the time of modification. This approach is often ill suited for those who have lost their jobs because the income of the unemployed borrowers is generally quite low.”
This is a conclusion that shouldn’t have taken 4 years to reach. We regularly hear about lenders telling borrowers “what a great deal they’re getting” when (if) a modification is offered. What they don’t get is if the borrower has lost their job, the only payment that works for them is $0. The example I like to use, is offering someone a Ferrari for $150k, when it usually sells for $250k. Great deal? You bet, but I still can’t afford it…
Highlights from the “Fixes”:
• Investigate whether the degree of “tightness” in the current mortgage market accurately reflects sustainable lender and appropriate consumer protection. Try to find an appropriate balance.
• Remove some of the obstacles to refinancing.
• Create loan modifications that make sense for each household, instead of blanket payment reductions. For example, if someone is unemployed, offer a 12-month forbearance program instead of a lower payment that they still can’t afford.
• Consider a more streamlined system for foreclosure alternatives like short sales & deed-in-lieu’s.
• Consider principle reductions
• Improve accountability and re-align incentives for mortgage servicers.
• Consider an REO to rental program.
My thoughts:
All of the above “fixes” are excellent (if not somewhat delayed), steps in finally fixing this mess. It won’t be quick and it won’t be easy, but any combination of the above could get housing back on the right track.
Of all the fixes proposed, however, I expect the potential REO to rental program to be the most controversial.
As noted in The Huffington Post last month, fair and affordable housing advocates were rejecting the idea of receiving this type of assistance from the financial sector.
“It's really a question of whether the banks that made so much money creating this crisis are going to profit again,” - Jeremy Rosen, policy director at the National Law Center on Homelessness and Poverty
He makes a point – the thought of big banks profiting from this mess is unconscionable. However, if tight regulations are put in place and there is an even mix of bank, for-profit and not-for-profit entities in place, it might be what’s best. We will have millions of homes on the market for years to come and there is no way they can be filled without some sort of rental or rent-to-own arrangement.
As I’ve written in other blogs recently, it’s long overdue that housing receive more attention, in the context of the overall economy. Hopefully, some the ideas presented in this report will be given some serious thought by those who have the power to do something about them…
At first read, much of the 25-page document reeks of “no kidding”. Many of the observations are obvious and very 2009. So are some of the proposed fixes.
Still, much of what was written needed to be brought to light, for those who don’t follow this sort of thing closely. Below, I’ve summarized some of the observations and potential fixes…
Highlights from the “Observations”:
• U.S. house prices declined 33% from their 2006 peak.
• More than $7 trillion in home equity was lost.
• The ratio of home equity to disposable personal income has declined to 55% - far below levels seen since this data series began in 1950.
• Currently, 12 million people are underwater on their mortgages.
Further, the report discusses the various hindrances to recovery, such as: difficulty in securing credit/mortgages; servicer issues (efficient processing of files, overwhelmed loss mitigation departments and the frequent financial incentive to foreclose versus homeowner assistance, i.e., short sale, loan modification, etc.); the cost and community impact of foreclosure; and unemployment.
The latter – unemployment – was something I’ve been waiting to see tied to housing in greater detail. As the report states:
“Another issue is the fact that many borrowers have gone delinquent or have defaulted because of income loss resulting from unemployment or other presumably temporary factors, which impairs their ability to meet previously affordable payment obligations. The basic HAMP modifications focus on longer-term payment reduction to a level that can be supported by the borrower’s income at the time of modification. This approach is often ill suited for those who have lost their jobs because the income of the unemployed borrowers is generally quite low.”
This is a conclusion that shouldn’t have taken 4 years to reach. We regularly hear about lenders telling borrowers “what a great deal they’re getting” when (if) a modification is offered. What they don’t get is if the borrower has lost their job, the only payment that works for them is $0. The example I like to use, is offering someone a Ferrari for $150k, when it usually sells for $250k. Great deal? You bet, but I still can’t afford it…
Highlights from the “Fixes”:
• Investigate whether the degree of “tightness” in the current mortgage market accurately reflects sustainable lender and appropriate consumer protection. Try to find an appropriate balance.
• Remove some of the obstacles to refinancing.
• Create loan modifications that make sense for each household, instead of blanket payment reductions. For example, if someone is unemployed, offer a 12-month forbearance program instead of a lower payment that they still can’t afford.
• Consider a more streamlined system for foreclosure alternatives like short sales & deed-in-lieu’s.
• Consider principle reductions
• Improve accountability and re-align incentives for mortgage servicers.
• Consider an REO to rental program.
My thoughts:
All of the above “fixes” are excellent (if not somewhat delayed), steps in finally fixing this mess. It won’t be quick and it won’t be easy, but any combination of the above could get housing back on the right track.
Of all the fixes proposed, however, I expect the potential REO to rental program to be the most controversial.
As noted in The Huffington Post last month, fair and affordable housing advocates were rejecting the idea of receiving this type of assistance from the financial sector.
“It's really a question of whether the banks that made so much money creating this crisis are going to profit again,” - Jeremy Rosen, policy director at the National Law Center on Homelessness and Poverty
He makes a point – the thought of big banks profiting from this mess is unconscionable. However, if tight regulations are put in place and there is an even mix of bank, for-profit and not-for-profit entities in place, it might be what’s best. We will have millions of homes on the market for years to come and there is no way they can be filled without some sort of rental or rent-to-own arrangement.
As I’ve written in other blogs recently, it’s long overdue that housing receive more attention, in the context of the overall economy. Hopefully, some the ideas presented in this report will be given some serious thought by those who have the power to do something about them…
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