Another housing intervention?
September 25, 2011 - 1:05 am
A friend in the home building business boiled down the woes of his industry and the American economy in just 10 words. “Housing used to be an investment,” he told me a couple of weeks back. “Now it’s an expense.”
This goes a long way toward explaining why President Obama is so intent on intervening in the housing market. For decades, home ownership was the foundation of the American Dream, the primary path to wealth accumulation and a secure retirement. Today, especially in Las Vegas, your mortgage payment is no different from your cable TV and cellphone bills — just a heck of a lot bigger.
So Obama is preparing another housing initiative. He made a short reference to it in his jobs speech to Congress this month, saying he wants “responsible” underwater homeowners to be able to refinance their mortgages at today’s record-low rates because doing so “can put more than $2,000 a year in a family’s pocket and give a lift to an economy still burdened by the drop in housing prices.”
Economists agree that the five-year free fall in home values is the root of the Great Recession, and that our economy won’t fully recover until housing is healthy — values climb, equity returns and demand for new houses grows.
The problem seems tantalizingly simple: Help people stay in their homes and slow the tide of foreclosures that have kept values from bouncing back.
The Obama administration is clinging to this conventional wisdom as it creates the guidelines for its latest foreclosure prevention campaign. But the problem is not that simple. And it never helps when the proposed remedy is as complicated as the problem itself.
The New York Times and other media have reported that this initiative, as yet lacking a clever name, could be a reinvention of the Home Affordable Refinance Program launched more than two years ago. The program has been a failure, especially in Nevada, because it limits the refinancing of federally backed mortgages to those worth 125 percent of a home’s value. In the Las Vegas Valley, where three out of four mortgages are upside-down, a lot of homeowners owe more than twice what their house is worth. HARP was supposed to help up to 5 million homeowners. To date, fewer than 1 million have been able to take advantage.
Allowing more underwater homeowners to refinance mortgages to lower rates would help in one of two ways. Either they’d have more spending money to put into the economy, or, preferably, they’d use that money to pay down their principal more quickly.
Richard Green, a USC real estate professor, said if someone has a 6 percent interest rate on a mortgage that’s 20 percent underwater, it will take 10 years to get back to even. But if that homeowner refinances to a 4.5 percent interest rate and applies the extra cash flow to principal, it will take less than five years to be back in the black, significantly reducing the chance that the homeowner might walk away from the home and default.
“The only way we get out from under as a country is if people have equity again,” Green told the Los Angeles Times this month.
Sens. Barbara Boxer, D-Calif., and Johnny Isakson, R-Ga., want the Obama administration to adopt the guidelines of a bill they introduced, which would eliminate HARP’s 125 percent loan-to-value restriction and most fees.
“Our bill is based on a very simple premise: If you have paid your mortgage through this difficult time and it has a high interest rate, but you’ve never missed a payment and you’re underwater, you should be rewarded with a program like this,” Boxer told a Senate subcommittee on Sept. 14. “You should have a chance to refinance at the current levels.”
Current levels are preposterously low. Last week, the average 30-year fixed mortgage rate was 4.09 percent, the lowest rate since 1951. The average 15-year fixed mortgage rate was 3.29 percent, the lowest rate ever. Those rates are expected to fall even farther following the Federal Reserve’s “Operation Twist,” intended to drive down long-term interest rates and get bailed-out banks lending.
But there’s a twist to all this: The only way to get these premium “average” rates on a home loan, in an incredibly tight credit market, is to have a credit score of at least 700 and a 40 percent down payment, Columbia University real estate finance professor Christopher Mayer told National Public Radio. An underwater homeowner, even with steady income and a credit score in the 800s, would have to pay thousands upon thousands of dollars in points and fees to get a bottom-barrel interest rate, putting them even deeper underwater if they roll those fees into the new loan.
“I think we need to have some kind of reasonable guidance for what is a fair rate to charge for somebody who is a really responsible purchaser to get a home,” Mayer said. “And I think we’ve swung too far in the other direction in terms of tightening credit.”
If Obama decides to back the Boxer-Isakson bill, it will be another case of him picking market winners and losers. Millions of homeowners would win, but banks and bondholders would lose — they’d lose performing mortgages and fees and be forced to take on new risks. Already, Bank of America is cutting 30,000 jobs because of new federal regulations. Operation Twist will tighten banks’ margins as well.
Every other Obama housing initiative has been a bust. The FHA Short Refinance program has helped fewer than 1,000 people nationwide in its first year. USA Today reported Wednesday that the Emergency Homeowner’s Loan Program won’t come anywhere close to its goal of helping just 30,000 homeowners. More than half the loans rewritten under the Home Affordable Modification Program have fallen back into default. And while national data aren’t yet available on the Hardest Hit States Fund — a means-tested program to help unemployed homeowners — Nevada, which received $150 million, has approved just 528 people for $4.43 million worth of assistance despite thousands of inquiries, according to the Nevada Housing Division.
The housing market is so sick and so distorted from previous interventions that it’s not possible to help someone without hurting another, whether it’s taxpayers, investors or homeowners who played by the rules. The sooner Obama leaves it alone, the sooner it will get better.
Glenn Cook (firstname.lastname@example.org) is a Review-Journal editorial writer.