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The Foreclosure Crisis That Will Not Go Away

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When the financial crisis broke in September 2008, it was widely understood -- both in policy-making circles and in popular conversation -- that problems in the U.S. housing market were central to the unfolding events. But thereafter, the events themselves took center stage: and the problems of the housing sector, though not forgotten, slipped down the political agenda and off the popular radar. That was a mistake. Problems in the U.S. housing market remain central to our continuing difficulties -- problems experienced by people wanting to buy houses, and problems experienced by people who already own one. Economically and politically, a resolution of the U.S. housing crisis remains a key requirement for long term prosperity and, more immediately, for the continuation of a Democratic White House.

Economically the current recovery is slow in part because the housing sector remains sluggish. The housing sector remains sluggish because the inventory of unsold houses remains high; and the inventory of unsold houses remains high because the foreclosure crisis refuses to go away. Politically, Obama and the Democrats are losing popular support because unemployment and job insecurity are rife. Unemployment and job insecurity are rife because the economy remains sluggish; and the economy remains sluggish in part because there are still so many foreclosed homes on the market. People are losing their homes in record numbers in contemporary America, and they are doing so now on Obama's watch, not on Bush's.

It is true that part of the current foreclosure crisis was inherited by the Obama administration. It is also true that part of it was not.

The Obama administration inherited a foreclosure crisis rooted in the large-scale growth of what were ultimately voluntarily adopted sub-prime mortgages. It now presides over a foreclosure crisis rooted in the large-scale growth of involuntary unemployment in which sub-prime lending plays an ever diminishing part. Indeed the housing sector remains sluggish these days precisely because sub-prime lending has been broadly eradicated - it is now significantly more difficult than it was in 2005 and 2006 to obtain a mortgage - while the general recession that sub-prime lending helped to trigger still eats away at the ability of existing home owners to pay their mortgages, sub-prime or not.

The first foreclosure crisis may well have triggered the second, but even so the two crises are not the same, and they do not deserve the same policy response.

Policy designed by the incoming administration to deal with a foreclosure crisis triggered by sub-prime mortgages is not equal to the task of dealing with a foreclosure crisis triggered by large-scale involuntary unemployment. Moral hazard issues kept the original Obama housing policy (HAMP) policy modest. It kept it modest because the incoming administration had no desire to reward fecklessness and (by implication) penalize responsibility. But people are losing their homes now, not because of their fecklessness but because of the economy's weakness. Many of those losing their houses in 2010 are innocent victims of a recession which they did not cause. There is no moral hazard issue in their case. They have done nothing wrong; and because they have not, it is time for a housing policy that is addressed to their needs and to their needs primarily. It is time for housing policy to move on.

Twice now, the Congressional Oversight Panel chaired by Elizabeth Warren has made clear the inadequacy of policy to date. In October 2009, it was Warren's view that "even when Treasury programs are running at full speed, foreclosures are estimated to outpace modifications by about two to one." Seven months later, the view was the same: "Treasury's response continues to lag well behind the pace of the crisis...its programs still are not keeping pace with the foreclosure crisis." Just 168,708 people helped in the first 12 months of the program, as Elizabeth Warren put it, when the rate of monthly foreclosures was nearer to 200,000! Why? For Elizabeth Warren at least, because the administration's plans seem 'targeted at the housing crisis as it existed six months ago, rather than as it exists now."

It is not that the Obama administration has been totally inactive or totally ineffective in its housing policy. On the contrary: on the demand side for housing -- on the plight of people wanting to acquire a mortgage -- the administration's record is clear and broadly positive. As the Congressional Oversight Panel have it:

It is likely that government intervention in the housing market, such as the homebuyers tax credits, support for Fannie Mae and Freddie Mac, a large increase in FHA insurance underwriting, and Treasury and Federal Reserve purchases of mortgage-backed securities, as well as Federal Reserve policy aimed at keeping interest rates low, have fostered increased demand for home purchases by making them more affordable and by reducing the cost of mortgage finance.

But what is also clear is that "some of those government interventions in the housing market are being scaled back or eliminated" at the very time when the assistance afforded under HAMP to people who already have a mortgage but can no longer afford to maintain it is proving to be fundamentally inadequate to the task faced. Under the existing HAMP, what you get is temporary help with your payments. What you don't get is help with reducing the amount you have borrowed. The help you get is also only temporary - even the "permanent" modification lasts only 5 years -- and still leaves you servicing large quantities of debt: "the typical post-modification borrower still pays about 59 percent of his total income on debt service" according to the Congressional Oversight Panel -- even more, as we just saw, according to the Treasury. Moreover, if you were underwater when you applied for the temporary help -- if the current value of your house had fallen to less than the size of your mortgage -- then any help you get under HAMP will still leave you underwater. Currently one American household in four is underwater. In Nevada, it is almost three houses in four! The intention behind HAMP was laudable. Its design and implementation has been less so: as Elizabeth Warren put it to Judy Woodruff, "it's as if we had a boat that's taking on gallons of water, and they're trying to bail it with a teaspoon."

The present housing situation is intolerable. It is morally intolerable. It is economically intolerable, and it is electorally intolerable. Innocent people are getting hurt. Economic recovery is being retarded. Support for progressive politics is being lost.

Which raises the question: why is this being allowed to happen? Is anyone in the White House awake on this issue? Tim Geithner and Larry Summers may not get it, but somebody needs to. If only to ensure that the Democrats hold on to that particular house for more than one presidential term, somebody working in the White House needs to design a program that will actually help, and needs to design that program in a hurry. The Democratic Party likes to present itself as the champion of the dispossessed. There cannot be a much more serious form of dispossession in modern American than the dispossession of your house. Can someone please tell the administration that it is time to keep all Americans in their homes, including Barack and Michele Obama in their temporary one. Because if policy does not change quickly and in the right direction, the first family may be back in the private housing market far sooner than either they or their supporters think desirable -- and that would be an appalling waste!