Correcting three myths about the housing market
The U.S. Senate should move quickly to confirm Mel Watt as the new head of the Federal Housing Finance Agency (FHFA), but not for any of the political or procedural reasons usually discussed. A quick confirmation is required because we need new leadership on U.S. housing policy — a policy that on some crucial points is headed in the wrong direction for the wrong reasons.
In the years since the collapse of the housing bubble, major Wall Street firms have prospered while millions of homeowners are still dealing with the wreckage of a damaged housing market. Thatâ€™s in part because nothing as large as a national housing market turns quickly. But itâ€™s also because persistent myths about the market are obscuring the data and driving policy in the wrong direction.
Here are three such myths, and the right way to think about them:
1.Â Â Â The foreclosure crisis is over.
Most news stories today focus on overall foreclosure numbers dropping and home prices rising, but the truth is more nuanced. Prices are indeed up in some wealthier neighborhoods, and foreclosures are dropping in many communities.
But the big foreclosure statistics donâ€™t include the significant number of delayed foreclosure proceedings still pending, and donâ€™t capture the realities facing many communities with high concentrations of poverty. In these communities, where predatory lending practices were commonplace during the bubble, homeowners still need help, and vacant homes are commonplace. The effect on the overall housing market and local business is clear, as struggling owners hold back the consumer spending that drives our economy.
Even the oft-cited â€śimprovingâ€ť national numbers remain far worse than they were before the bubble. There are 1.3 million homes in some state of foreclosure or owned by banks. The foreclosure crisis continues — and it affects us all.
2.Â Â Â We have to let â€śdeadbeatâ€ť homeowners fail.
Too much of our policy on the foreclosure crisis has been driven by a misplaced emphasis on â€śmoral hazard.â€ťÂ Market purists argue that itâ€™s necessary for people who make bad investments to lose money, because if they are bailed out by the government and arenâ€™t â€śpunished,â€ť then everyone else will make the same bad choices and wait for a government bailout. In the name of moral hazard, regulators and the market have argued that we must let struggling homeowners fail, go through foreclosure, and lose their homes.
This argument is simply wrong — for three reasons.
First, defaulting on your mortgage and going through foreclosure is an uncertain and terrifying process that nobody would enter willingly. There is no guarantee, whatever program is in place, that you will emerge from it able to stay in your home. Regardless of any principal reduction, defaulting on a mortgage places a black mark on a borrowerâ€™s credit history, making it difficult and expensive for that borrower to get money for a car, or college, for years after.
Second, experience shows that these homeowners are not the irretrievable deadbeats that some creditors claim them to be. The entire U.S. economy was taken in by the housing bubble. At my organization, we have learned that our clients pay on time when given a loan payment that they can afford. Our borrowers have an excellent repayment record on their new, reduced-principal mortgages.
Finally, it makes no sense to sacrifice our entire economy in the name of a single ideological principal, which has hardly been enforced consistently over the last decade. When this same crisis threatened the livelihood of our largest financial institutions, moral hazard was put aside in the name of economic stability, and the government provided generous aid packages to help them weather the storm.Â The role our homeowners, families, workers, and local small businesses play in the economy is deserving of equal respect. Moral hazard should not be our first concern; we need to stay focused on the best choice for the big picture.
3.Â Â Â Thereâ€™s nothing more the government can do.
There are important steps the government can take without huge taxpayer cost. Currently, in the name of moral hazard, the FHFA — which Watt will run if his appointment is confirmed — prevents homeowners who have loans backed by Fannie Mae and Freddie Mac from taking part in programs that reduce the principal owed on a mortgage. My organization has had great success by buying homes at or beyond foreclosure and reselling them back to struggling homeowners with mortgages they can handle. But we are currently barred from working with any of Fannie and Freddieâ€™s legions of underwater borrowers because the FHFA refuses to allow the government-sponsored enterprises to sell homes — even in foreclosure — to firms like ours, which offer borrowers a reduced principal balance.
There is no fiscal logic to this decision. Banning participation in principal reduction only prevents Fannie and Freddie from recouping some of their losses, and forces homeowners to remain in unwinnable situations. We have been able to reduce our clientsâ€™ monthly mortgage payments by almost 40 percent on average, and they overwhelmingly pay their new mortgages on time. Fannie and Freddie are strengthened by getting a fair market price for loans in foreclosure, without the costs associated with repossessing and reselling the homes.
Our current housing policies ignore these clear truths. They have been driven too long by ideology that sounds good on TV but makes no sense in our neighborhoods. We need new leadership at FHFA so we can have a clear, real conversation about what works, what doesnâ€™t, and whatâ€™s right for our communities and our national economy.
PHOTO: A foreclosed home is seen in Bullhead City, Arizona, November 4, 2009.Â REUTERS/Lucy Nicholson