The U.S. Attorney General has unveiled a joint state and federal settlement with banks aimed at "righting the wrongs" of the housing bubble. It's a start -- a start that comes after the battle has mostly ended. The reality is that the window of opportunity to address this crisis has effectively closed. Middle America is wilting under an attack of Vampire Mortgages and no one from either side of the partisan divide will be coming to their aid.
The "landmark" settlement sets aside $17bn dollars for principal reductions on underwater mortgages. That sounds like a lot of money until you compare it to the official figure of $700bn in negative equity Americans face so far from the housing bubble. And that estimate is based on some laughably optimistic assumptions. The rest of the settlement relies on the usual palliatives, with refinancing continuing its role as the favorite solution of policy makers. Solving the mortgage crisis with low-cost, Federally-subsidized refinancing is like using cough medicine to treat lung cancer.
Since World War II, home ownership has been the most reliable method for lower and middle income families to build capital. Thanks to Wall Street innovations the financial dreams of tens of millions of families have become a trap. Millions of Americans are now being sucked dry by vampire mortgages that will never, at any interest rate, produce the value that previous generations counted on.
Many homeowners who haven't tried to sell remain blissfully unaware that they are underwater. As Joshua Rosner wrote more than a decade ago in his warning about the then-emerging housing bubble, "a home without equity is just a rental with debt." Millions of Americans are now de facto renters.
Economists blame the housing slump on unemployment and weak economic conditions. By that reasoning, helping people avoid foreclosure and refinance to a lower-cost mortgage leaves them in better position to get on with their lives when economic conditions improve. With their emphasis on esoteric models and narrow assumptions, economists have completely missed the gaping hole in the hull of our economy.
Americans are now saddled with housing debt that will never produce the value they are counting on. To make matters worse, the losses incurred by those who engineered this crisis were largely socialized, meaning that these same people being bled by vampire mortgages will, over time, have to pay the banks' debts from the housing bubble as well as their own.
The phony housing boom reached much farther into the pockets and prospects of ordinary Americans than most people appreciate. Nearly a third of all home mortgages are underwater, but that's not the worst of it. In addition to conventional mortgages, there are currently more than 13 million home equity loans outstanding. By some estimates more than 90% of those loans are underwater, potentially raising the number of non-performing mortgages nationally to nearly half.
In some markets, housing prices adjusted for inflation may not return to their Bush-era highs in our lifetimes. Last year the Case-Schiller home price index was still running more than 20% above the long-term average. There is no rebound coming.
Federal action to slow foreclosures and hold down interest rates are prolonging this pain while doing nothing to address the real problem of dead equity. Even if employment and incomes increase, these vampire mortgages will undermine the value of home-ownership for decades to come, depriving millions of Americans of their best hope for building capital.
In spite of the mounting financial harm, people will not abandon these mortgages except in the most dire straits. For most Americans, a mortgage is not a simple business decision. It affects your peer group, who your kids play with, and what church, Little League, or bunco group you participate in. A mortgage is tied to the very large issue of what school your children are going to attend and what quality of education they can expect.
Renting for a few years would make the most financial sense for millions of families, but our rental infrastructure is weak. There are no large-scale corporate house rentals with the kind of even quality you can find in corporate apartments. And the apartment market is, naturally, focused on smaller units. Families are not going to abandon the mortgage if they can possibly avoid it. The vampire will feed.
Refinance merely decreases, slightly, the cost of maintaining dead equity. Refinance programs have been an unmitigated failure, but they remain attractive in Washington as way to talk about solving this problem without actually having to do something.
What might have worked? Allowing homeowners to have their equity readjusted as part of a bankruptcy (a "cram down") would have been a sensible response. No one would receive this relief without the discipline, scrutiny or credit impact of a bankruptcy, but millions of people now being bled by a vampire mortgage could remain in their homes without having their mortgage suck them dry for a generation.
Instead we socialized much of Wall Street's debts. Then we added trillions in Federal deficit spending in an effort to pour fuel into a broken machine. The additional trillions the Federal Reserve has poured into mortgage bonds to maintain artificially low rates has mostly created a windfall for banks and for individuals unaffected by the crisis. Those same homeowners bleeding from non-performing mortgages will also eventually have to pay off the banks' bills in the form of higher taxes and interest rates.
The Obama Administration could have done something about the housing collapse. Instead Obama wasted all of his political capital on a failed effort to realize Ted Kennedy's dying dream. Hung over from Obama's bender Washington is locked in a hopeless stalemate, unable to pass even the simplest legislation.
So the vampire continues to drain the financial futures of struggling homeowners. The banks got what they needed, but homeowners are on their own. Washington's favorite "solution," refinancing into lower interest rates mortgages, will make it cheaper to feed the beast, but it won't stop the bleeding or rescue the middle class from a generation of diminished horizons.
At least all our health care problems have been solved.