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…