Correcting three myths about the housing market

By Elyse Cherry
December 9, 2013

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. That’s in part because nothing as large as a national housing market turns quickly. But it’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.    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 don’t include the significant number of delayed foreclosure proceedings still pending, and don’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 “improving” 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.    We have to let “deadbeat” homeowners fail.

Too much of our policy on the foreclosure crisis has been driven by a misplaced emphasis on “moral hazard.” Market purists argue that it’s necessary for people who make bad investments to lose money, because if they are bailed out by the government and aren’t “punished,” 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 borrower’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.  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.    There’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 Freddie’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 clients’ 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 doesn’t, and what’s right for our communities and our national economy.

PHOTO: A foreclosed home is seen in Bullhead City, Arizona, November 4, 2009.  REUTERS/Lucy Nicholson

8 comments

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Ms. Cherry is correct. In fact, Fannie and Freddie could have saved taxpayers billions of dollars and NOT stoked moral hazard if they had implemented a responsible program for reducing principal balances on delinquent borrowers’ underwater mortgages. Instead of ramping up short sales to third parties as they have, here’s what they should have done as published by the Progressive Policy Institute: http://www.progressivepolicy.org/2012/07  /another-tool-in-the-toolkit-short-sale s-to-existing-homeowners/.

Posted by rykmo | Report as abusive

Well, we saved the financial institutions, which is all that is important to our leaders, since their bosses required that. We don’t want to let the serf class think that anyone is there to help them since they will be less easily controlled through fear tactics. If these people don’t like it, they can vote for someone else, but they don’t. They choose their old masters every time. You can’t force people to do what is in their best interest, and anyway, perhaps they are correct, perhaps the pain is good and what we should all want.

Posted by brotherkenny4 | Report as abusive

Here Here. This amazing person makes perfect sense. Love.

Posted by 2Borknot2B | Report as abusive

I can not agree with the writer here to sacrifice those victims who were cheated into this historically horrible fraud for the name of economy recovery.
My son, 24 years old then, was a typical example. Just came out of college, he was self employed with no established income record at all. A real estate agent lined up with a Bank of America employee led him to purchase a $630,000.00 house, with the first mortgage and second mortgages both from Bank of America. Naturally, the loan was failed. This young man had his young life ruined, credit crashed, mental scar last forever.
But, those rich few pocketed billions from selling, reselling of the “swap” papers. Shorts on those papers(derivatives) at the same time, shorting on the financial markets. So, millions of middle class lost their lifetime investments, pension funds collapsed on their poor retirees, we the middle class end up paid, or will continue to pay the trillions of bail out money. The damages and list can go on and on.
Here now, we got another “expert” steps out to tell us “move” on, and forget those rich few and banks, leave those millions of victims, under the flags of ECONOMY. Do you know? This is exactly the reason, when 90% of our whole population are suffering from this super scandal, but the rich 1%, and 9% end up are owning 83% of our national wealth now.

Posted by chungdad | Report as abusive

After all those money lost from our middle class and tax payers, after all the rich few expanded their pockets to own 83% of national wealth, one more “expert” is coming out to urge the court system and government to forgive and forget. Forgive the fraudulent riches, and forget the exploited poor, under the name of ECONOMY.

Posted by chungdad | Report as abusive

“The entire U.S. economy was taken in by the housing bubble.”

Actually, there were a lot of people who were not taken in. However, there were a also lot more people who wanted to believe that they could use money that they borrowed from someone else to buy an endlessly appreciating asset and then repay their loan with roughly the same amount of money that they would be spending on anyway on renting each month.

Posted by walstir | Report as abusive

“The entire U.S. economy was taken in by the housing bubble.”

Actually, there were a lot of people who were not taken in. However, there were a also lot more people who wanted to believe that they could use money that they borrowed from someone else to buy an endlessly appreciating asset and then repay their loan with roughly the same amount of money that they would be spending on anyway on renting each month.

Posted by walstir | Report as abusive

Do some research on how Boston Community Capital makes its money – yes, this non-profit has an income of approximately $1.2 Million for 2011.

Elyse Cherry – made $313K in 2011 and $261K in 2009 (that’s quite a raise for a non-profit) running Boston Community Capital – it is able to attract capital because it is a CDFI – Elyse’s non-profit , BCC, has the ability to give out Federal Corporate Tax Credits to Big Banks who invest money in Boston Community Capital projects. All of us working stiffs will have to pay more in taxes in order for Ms Cherry’s non-profit to thrive and Ms Cherry can laugh all the way to the Bank.

Here is an article on New Market Tax Credits from the US Treasury being assigned to Boston Community Capital.

http://www.bostoncommunitycapital.org/ne ws/75-million-new-market-tax-credits-awa rded-boston-community-capital

Rebecca Regan – the COO of BCC was paid $222K in 2011

Andrew Chan – of BCC was paid $243K

Sharon Shepard of BCC was paid $223K

5 other people made in the $100K-$150K

So Elyse and the rest of the Boston Community Capital have no skin in the game and the more homeowners that get caught in foreclosure means there are more people for Elyse to profit on.

The Sun Initiative is the way Elysee invests the money she gets from the Big Banks, then the Big Banks get to reduce their future corporate income with Tax Credits BCC hands to the BANK.

Elyse is making a great living by giving away our/yours future Tax dollars. I wish Ms Cherry would be honest and admit how she makes her money. How many folks do readers know at for profit companies who have seen a 20% raise since 2009 ( Elyse made $261K in 2009 and in 2011 made $313 – I’m curious to see her raise for 2012).

Posted by Goldman1 | Report as abusive

[…] Correcting three myths about the [U.S.] housing market – Reuters […]

[…] chief executive officer of non-profit community development institution Boston Community Capital, writing for news service Reuters, disagrees. She lists both of these as her top two myths of the housing […]