Almost all Americans recognize that one of the most serious obstacles to an economic recovery is the lingering after-effects of the housing crisis. Apparently, the Federal Government hasn’t caught on yet.
Many Americans have differing opinions about the origin of the housing crisis. Was it greedy bankers, or greedy thieving homeowners? Or a little of both? In any event, the housing bubble pushed up prices across the entire spectrum of US real estate fueled by easy money and a willing Federal government. The consequences were widespread and nearly catastrophic.
American citizens have watched massive bailouts of the banking system due to reckless or incompetent investments in mortgage securities. I have long supported TARP as the only pragmatic way to address a systemic problem that threatened all of us. Thereafter, led by the left-leaning Obama administration, the Federal Government attempted to implement mortgage modifications for defaulting homeowners in order to “keep them in their homes”. Curiously, despite the “best” intentions, the re-default rate has been extraordinarily high which confirmed the view that many of these people should have never been lent money in the first place. This latter program has been more controversial since it might in some, many or most instances, depending on your point of view, reward borrowers for misbehavior. Again, it is simply a reasonable pragmatic response to an unprecedented problem. It would be nice to say that misbehaving borrowers would not be assisted, but the Government does not exercise discretion very well. In any event, the program has been far from successful.
Both parties have failed to recognize the political and moral consequences that have flowed from these decisions. Homeowners who are still paying their inflated mortgages aren’t receiving any government assistance. This is a huge class of people in all walks of life and it is difficult to generalize. But clearly the decline in house prices (the largest financial asset of most people) has created a reverse “wealth effect” which is constraining the economic recovery. One category that calls for some special attention are borrowers who now have mortgages that exceed the value of their house, in some cases by substantial margins. (I am excluding any home equity loans from this discussion). This phenomenon also calls for a pragmatic solution in the form of mortgage modification simply for the purpose of stabilizing the economy. This is not limited to subprime loans. Among all homeowners, 20% are “underwater” and there is little difference between subprime and prime borrowers. The New York Times estimated the size of negative equity as $700-800 Billion.
Many banks are willing to make some accommodation to “underwater” borrowers, and the Federal government appropriated funds to share a portion of the modification. A frequent formula is that a modification (i.e., a reduction) of up to $100,000 would be shared equally between the Feds and the Bank. But guess what the principal roadblock is????
Fannie, Freddie, the VA, and the FHA do not allow reductions of mortgages which they hold or which they have securitized. The result is that few mortgages have actually been modified. Their rationale is that such a loan modification would create a “moral” hazard by encouraging subsequent borrowers to over-extend themselves in the future. Again, this is not a case of subprime loans; virtually all of the Freddie and Fannie loans are prime. You might ask why NOW is the Federal Government getting morality? Apparently, the White House is unable to order a change in the practices at Freddie and Fannie despite the fact that they are now owned by the Feds. This seems an odd place to suddenly become moralistic for a nation that pays people more not to work than can be earned by working and pays unwed mothers more for each subsequent child. Most evidently, the bailout of the banking industry has created a widespread sense of unfairness (thanks, Tea Party). At this point, we (the Government) need to do everything possible to restore equilibrium in the housing market. The President strongly suggested that banks assist borrowers in refinancing at lower rates. That is a good idea in that it provides a benefit, albeit limited, to many homeowners who are paying their mortgages. But mortgage modification for “underwater” mortgages is also a useful and necessary step.
As I said in the beginning, we are simply in the business of pragmatism at this point. We are all going to benefit from an improving economy.
(Source: The New York Times, October 6, 2011)
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