Lost in the campaign arguments over who’s to blame for a weak economy and sluggish hiring is what has and hasn’t been done to improve home sales and housing finance, key causes of the nation’s severe financial crisis and ones that continue to drag against a robust recovery.
Two factors still bedevil housing: a huge inventory of foreclosed homes in the hands of banks and the federal government, and a huge number of homes that carry mortgages that are valued more than the dwellings are worth now – “underwater” mortgages.
The foreclosure problem is improving, albeit slowly. The Mortgage Bankers Association said in August that about 11.62 percent of all outstanding mortgages were in foreclosure from April through June or at least 30 days late on payments. That’s still high by historical standards, but it’s almost a full percentage point lower than during the same period a year ago.
Most vexing are the “underwater” mortgages. Many of these homeowners can neither sell their homes nor take advantage of refinancing programs. The Obama administration has relaxed the rules so that underwater borrowers can refinance, but the problem remains that many owe far more than their homes are worth now, regardless of what interest rates they pay on their mortgages. It’s why foreclosure rates, although falling, remain unusually elevated.
As a candidate in 2008, Barack Obama supported revamping bankruptcy laws in order to let homeowners have the courts order that the underwater portions of their mortgages be wiped out, similar to how companies that file for bankruptcy protection can shed their debts. This would have put banks on the hook for losses.
But as president, Obama has never fully pursued this, bowing to Republican opposition. The bankruptcy proposal is important, its backers say, in part because a mortgage often isn’t a borrower’s only debt. Many of these borrowers got so-called liar’s loans, accepting high-rate mortgages in exchange for being able to simply state their incomes.
Consequently, these borrowers have too much overall debt that needs restructuring relative to their incomes, said Michael Calhoun, the president of the Center for Responsible Lending, an advocacy group in Durham, N.C. A loan modification isn’t enough, given their high debt, he said.
“The big part still missing is principal reduction” on the mortgage, said Calhoun, whose group has advocated more aggressive debt forgiveness.
Instead of initially pursuing principal reduction, Obama launched voluntary programs that provided financial incentives for mortgage servicers – who collect payments on behalf of the investors who own mortgages – to modify troubled mortgages. The administration hoped to modify up to 4 million mortgages, a goal that’s fallen short at around 1 million permanent modifications to date.
The number looks better when servicers’ own modifications are counted. Many servicers didn’t participate fully in the government programs but designed their own. Since September 2009, servicers have approved 2.6 million permanent mortgage modifications outside the government programs.
If mortgage modifications haven’t completely lived up to hopes, the Home Affordable Refinance Program gets higher marks. It involves allowing underwater homeowners to refinance, with the new mortgages purchased by Fannie Mae or Freddie Mac, the mortgage finance titans that the government took over in the summer of 2008. More than 1.6 million homeowners have been able to refinance under the program since April 2009, more than 600,000 of them this year alone.
“I think it’s fantastic. When I look at the national numbers and see 600,000 who otherwise wouldn’t have (been able to refinance) . . . that is helpful,” said Faith Schwartz, the executive director of the HOPE NOW alliance.
HOPE NOW is a private-sector response to the housing crisis, created at the end of the George W. Bush administration. With the benefit of having tried to fix housing in two administrations, Schwartz gives Obama praise for some efforts, criticism for others.
Schwartz praises efforts by the Federal Housing Administration, the Treasury Department and the Federal Reserve to provide liquidity in the housing market. That’s a fancy way of saying they’ve kept money flowing into an impaired housing sector.
“I’m pretty thankful for the FHA. . . . Private markets won’t provide that today,” she said.
But Schwartz agrees with GOP presidential candidate Mitt Romney’s call for a clear plan to get Fannie Mae and Freddie Mac, which had operated as private companies, out of government conservatorship. The Obama administration released a plan in February 2011 for reducing their footprint but it amounted to discussing broad choices without advocating any one path.
“We have now passed the four-year anniversary of the government takeover . . . and the Obama administration has failed to come up with anything more than noncommittal options to reform these institutions,” says Romney’s campaign report on housing, itself offering no concrete measures on how it’d revamp Fannie and Freddie.
Fannie and Freddie’s outsized role in mortgage finance today is crowding out the private sector, said a Romney aide who’s involved in formulating the campaign’s housing policy.
“That impacts the whole market. . . . If you are pricing out the private capital, how on earth could they” compete, asked the aide, who demanded anonymity in order to discuss the campaign’s thinking. “As long as you are artificially under-pricing everyone, nobody else can get in.”
Fannie and Freddie were created in 1938 and 1970, respectively. They purchase mortgages underwritten by banks, operating a secondary market so the banks don’t have to retain loans and can pass them off in order to keep lending. The purchased mortgages are pooled together, a process called securitization, and investors buy mortgage bonds. A homeowner’s monthly mortgage payment becomes the revenue stream that flows to investors.
From the late 1990s on, Wall Street banks moved aggressively to securitize mortgages and compete with Fannie and Freddie. Fueling this was a push by the Clinton and Bush administrations to drive up America’s homeownership rate, which reached record levels in 2004 and 2005 at above 69 percent.
But this explosion of mortgage lending had a dirty secret. Underwriting standards fell sharply, and inflated home prices rose by percentages unseen in American history. It all started unraveling in 2007, and the government stepped in to help rescue a big Wall Street bank, Bear Stearns, in March 2008. President George W. Bush declined to do the same for investment bank Lehman Brothers in September 2008, and a financial crisis ensued.
Since then, private-sector securitization has all but vanished, as investors no longer trust these financial instruments. It’s left Fannie and Freddie the only game in town, now backstopping about 90 percent of new mortgage lending.
It’s why the question of what to do about Fannie and Freddie looms so large in this election.
The Romney plan calls for the sale of 200,000 foreclosed properties in government hands, alternative measures to foreclosure – such as short sales – and an aggressive push for what’s called shared appreciation. This is when banks forgive underwater portions of a mortgage in exchange for capturing the upside of future profits when the home is sold.
The Obama administration is already doing all these things, but the Romney aide said they’d be done more efficiently, and that a Romney administration would allow for the shared-appreciation agreements providing the future profits to be traded among investors.