So far, 2012 has been downright cheery on the economic front, if you can resist the urge to rubberneck at that multi-car pile-up over in Europe. Unemployment is down appreciably. Used car prices, a barometer of pent-up consumer demand, are climbing. Apartment rents are going up too, and not just in already oppressive New York City.
But hold on, says the Federal Reserve Bank of the United States — housing prices are still 33 percent below their 2006 peak. A whopping $7 trillion in home equity has been lost, with the bulk of it hitting America’s middle-income consumer class. Thus, on Jan. 4, the Fed sent Congress a 28-page white paper, urging the government to take action on this issue.
One of the (many) problems with the way the U.S. government handled the financial crisis was that it took a “banks first” approach. The Fed and the Treasury recapitalized the largest banks through the worst of the crisis, providing a levy against the flood of missed payments by mortgage and consumer borrowers. The government did very little about the root of the problem, which is that people with diminished incomes found themselves with mortgages larger than the market value of their homes. The Fed says that today, nearly six years after the peak in real estate values, 20 percent of homes with mortgages are underwater. In Nevada, Arizona and Florida, half of home borrowers owe more than their homes are worth.
The foreclosures that have followed since 2008 have resulted in the wholesale dumping of perfectly good housing inventory on the market, further depressing prices and pushing still more borrowers into insolvency, thereby exacerbating the problem. You would expect a wave of bargain hunters to snap up all of this cheap inventory, but the banks aren’t eager to repeat the mistakes of the last 10 years by extending them easy credit.
Economist Dean Baker, co-director of the Center for Economic and Policy Research, came out early in the financial crisis with a very logical foreclosure crisis fix: Let people surrender their homes to the bank but then live in them as renters until they can get back on their feet and attempt ownership again. By keeping people in their homes, Baker argued, the government could avoid some of the nasty side effects of foreclosures, particularly neighborhood blight. The Fed has finally come around to something like this idea, pushing in its paper a “deed-for-lease” program that would allow people to give up their homes without giving up occupancy.
But the heart of the Fed’s solution — if the Fed can accurately be said to have a heart — is for the government to take steps to end the foreclosure epidemic, lest another million homes hit the market through foreclosure in 2012 and then again the year after. To do this, both the public and the banks are going to have to be willing to take some immediate losses in exchange for long-term gains.
Any such effort should start with the government and Fannie Mae and Freddie Mac, currently run under government receivership. Fannie and Freddie guarantee most mortgages issued by private banks, in effect taking the lenders off the hook in the event of a default. Obviously, this creates moral hazard for the banks — enabling them to loan to anyone without fear of suffering losses.
To keep the banks in line, Fannie and Freddie reserved the right to force the banks to buy back egregiously issued loans, should they turn bad. The problem is that Fannie and Freddie are now run with an eye toward minimizing losses to the U.S. Treasury. So the two companies are “putting back” loans with a vengeance. The Fed thinks that Fannie and Freddie need to lighten up, even if short-term losses to the government rise.
Next up is loan refinancing, which is what a lot of borrowers were promised would be available to them when they took out their mortgages. The Fed says that “Perhaps only about half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing.” Again, says the Fed, Fannie and Freddie should step in to help, absorbing some of the refinancing risk that the banks won’t.
Perhaps most interesting is a potential change in the Fed’s attitude toward mortgage modifications, which it generally resists. The central bank estimates that it would deduct $700 billion from financial-sector balance sheets (including Fannie and Freddie) to bring mortgages into line with home values — but goes on to remark, uncharacteristically for an institution representing the financial sector, that “Further research or policy experiments in this area would be useful.” Evidently the central bank’s technocrats see the foreclosure problem as serious enough that the idea of mortgage modification is no longer verboten.
Like the auto industry, housing is intricately entwined with the economy. We know from experience that the financial industry depends on it. Employment in construction, design and retail depend on a healthy real estate market. The Fed sent its white paper to Congress, but the man who should really be listening is in the White House. Ben Bernanke has spoken — there can be no lasting recovery without a real-estate healing. President Obama can’t make Congress budge on anything and he can’t make the private banks lend. But he controls the Treasury and, through it, Fannie and Freddie. Bernanke is telling him to act, and he should. Well in advance of November.
But hold on, says the Federal Reserve Bank of the United States — housing prices are still 33 percent below their 2006 peak. A whopping $7 trillion in home equity has been lost, with the bulk of it hitting America’s middle-income consumer class. Thus, on Jan. 4, the Fed sent Congress a 28-page white paper, urging the government to take action on this issue.
One of the (many) problems with the way the U.S. government handled the financial crisis was that it took a “banks first” approach. The Fed and the Treasury recapitalized the largest banks through the worst of the crisis, providing a levy against the flood of missed payments by mortgage and consumer borrowers. The government did very little about the root of the problem, which is that people with diminished incomes found themselves with mortgages larger than the market value of their homes. The Fed says that today, nearly six years after the peak in real estate values, 20 percent of homes with mortgages are underwater. In Nevada, Arizona and Florida, half of home borrowers owe more than their homes are worth.
The foreclosures that have followed since 2008 have resulted in the wholesale dumping of perfectly good housing inventory on the market, further depressing prices and pushing still more borrowers into insolvency, thereby exacerbating the problem. You would expect a wave of bargain hunters to snap up all of this cheap inventory, but the banks aren’t eager to repeat the mistakes of the last 10 years by extending them easy credit.
Economist Dean Baker, co-director of the Center for Economic and Policy Research, came out early in the financial crisis with a very logical foreclosure crisis fix: Let people surrender their homes to the bank but then live in them as renters until they can get back on their feet and attempt ownership again. By keeping people in their homes, Baker argued, the government could avoid some of the nasty side effects of foreclosures, particularly neighborhood blight. The Fed has finally come around to something like this idea, pushing in its paper a “deed-for-lease” program that would allow people to give up their homes without giving up occupancy.
But the heart of the Fed’s solution — if the Fed can accurately be said to have a heart — is for the government to take steps to end the foreclosure epidemic, lest another million homes hit the market through foreclosure in 2012 and then again the year after. To do this, both the public and the banks are going to have to be willing to take some immediate losses in exchange for long-term gains.
Any such effort should start with the government and Fannie Mae and Freddie Mac, currently run under government receivership. Fannie and Freddie guarantee most mortgages issued by private banks, in effect taking the lenders off the hook in the event of a default. Obviously, this creates moral hazard for the banks — enabling them to loan to anyone without fear of suffering losses.
To keep the banks in line, Fannie and Freddie reserved the right to force the banks to buy back egregiously issued loans, should they turn bad. The problem is that Fannie and Freddie are now run with an eye toward minimizing losses to the U.S. Treasury. So the two companies are “putting back” loans with a vengeance. The Fed thinks that Fannie and Freddie need to lighten up, even if short-term losses to the government rise.
Next up is loan refinancing, which is what a lot of borrowers were promised would be available to them when they took out their mortgages. The Fed says that “Perhaps only about half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing.” Again, says the Fed, Fannie and Freddie should step in to help, absorbing some of the refinancing risk that the banks won’t.
Perhaps most interesting is a potential change in the Fed’s attitude toward mortgage modifications, which it generally resists. The central bank estimates that it would deduct $700 billion from financial-sector balance sheets (including Fannie and Freddie) to bring mortgages into line with home values — but goes on to remark, uncharacteristically for an institution representing the financial sector, that “Further research or policy experiments in this area would be useful.” Evidently the central bank’s technocrats see the foreclosure problem as serious enough that the idea of mortgage modification is no longer verboten.
Like the auto industry, housing is intricately entwined with the economy. We know from experience that the financial industry depends on it. Employment in construction, design and retail depend on a healthy real estate market. The Fed sent its white paper to Congress, but the man who should really be listening is in the White House. Ben Bernanke has spoken — there can be no lasting recovery without a real-estate healing. President Obama can’t make Congress budge on anything and he can’t make the private banks lend. But he controls the Treasury and, through it, Fannie and Freddie. Bernanke is telling him to act, and he should. Well in advance of November.
