Huffpost Business
Loren Berlin Headshot

In State Of The Union, Housing May Be Key Step In Economic Recovery

Posted: Updated:
Print
Getty Images
Getty Images

In Tuesday night's State of the Union address, President Barack Obama is expected to tout a settlement between states' attorneys general and five of the nation's largest banks over bad mortgage practices. But does the proposed deal go far enough?

Because a housing market recovery is key to strengthening America's struggling economy, the settlement represents the Obama administration's best opportunity before the 2012 presidential election to bolster the national economy, said Mark Zandi, chief economist at Moody's Analystics.

The question for Zandi and other economists is not if a settlement will impact the economy, but rather, what a good deal looks like. The proposed deal would deliver roughly $20 to $25 billion in assistance to struggling homeowners, a sum Zandi considers reasonable, explaining that "should go a long way" toward improving the housing market.

However, others disagree. The deal currently on the table is inadequate given the $750 billion that underwater homeowners owe on their property, and thus is little more than a "modest fine" against the banks by comparison, said Simon Johnson, former chief economist at the International Monetary Fund, currently a professor at the Massachusetts Institute of Technology and an editor at large for The Huffington Post.

A settlement that offers only a small amount of relief to homeowners is bad for the economy because it undermines consumer's confidence in the housing market, Johnson explained. Specifically, homeowners need to know that the government will protect them from bad mortgage companies and bad mortgage practices, otherwise they won't buy homes.

"People's willingness to buy and sell houses is a huge chunk of the American economy. But, if mortgage companies aren't held accountable for their wrongdoings, all of that is jeopardized," Johnson said. "Already people are afraid to refinance a home because they worry they won't understand the mortgage contract, or won't be protected if the fine print has something unpleasant in it."

"I don't think people are going to come out of this process thinking that they're going to get ripped off if they get a mortgage," said Zandi. "Given the creation of the Consumer Financial Protection Bureau and everything else being done outside this lawsuit, I think it's quite the opposite for consumers."

According to Johnson, a larger settlement would also benefit the economy by helping the 20 percent of Americans with mortgages who owe more on their loan than their home is worth. As the deal stands now, Johnson asserted, the Obama administration is wasting its opportunity.

Though the two economists disagree on the efficacy of the deal as currently proposed, both believe that a robust settlement has the potential to positively impact the larger economy.

"The more good loan modifications and principal reduction we can get done, the sooner we work through the foreclosure problems and house prices start to rise again," Zandi explained. "Once house prices start rising, lots of good macroeconomic things start to happen."

Specifically, as homes increase in value, consumers are more willing to spend money, stimulating the economy. At the same time, a stronger housing market helps small businesses since entrepreneurs frequently take a loan against their home to fund their business. In recent years, banks have been reluctant to lend against those homes because of falling house prices, said Zandi, who added that increasing home prices strengthen local governments by increasing tax revenues.

The deal has been in the works since October 2010, when attorneys general from all 50 states banded together with the federal government to punish five large financial institutions -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial -- for mortgage-related misconduct, including robo-signing and failing to provide mortgage modifications to eligible homeowners. In addition to the monetary penalty, the deal is expected to reform the mortgage servicing industry and require banks to offer relief to homeowners in the form of modifications, principal write-downs and refinancing, among other options.

Around the Web

$25B deal with banks over deceptive foreclosure practices sent to AGs as ...

Foreclosure Robo-Signing Deal Worries NY Official

Obama may highlight foreclosure settlement in state of the union

Obama to make pitch for second term in State of the Union

State of the Union Preview: Housing and Fairness Don't Connect

Political Push Moves a Deal on Mortgages Inches Closer

State of the Union will focus on restoring the middle class