You may not know it, if you watch only Washington beltway politics, but we are currently in the midst of a housing crisis of monumental proportions. It is a housing crisis initially caused by the inadequate regulation of private sector mortgage lending when George W. Bush was president. It is a housing crisis which was subsequently transformed and compounded by the large scale involuntary unemployment which the 2008 financial crisis and resulting recession left in its wake. It is a crisis which the Obama administration inherited, and which has deepened on its watch. It is also one which unexpectedly dropped into the administration's hands a new and potentially potent policy instrument -- a fully publicly-controlled Fannie Mae and Freddie Mac.
However, instead of using this newly acquired policy lever to bring the housing crisis to a rapid and effective close, the U.S. Treasury and HUD combined on Friday to propose that they should "responsibly reduce the role" of the two GSEs "in the mortgage market and, ultimately, wind down both institutions." Four years into the longest housing crisis in U.S. history, a Democratic administration is proposing to hand back prime responsibility for the financing and underwriting of U.S. housing to the very private forces whose mismanagement of these key tasks in the Bush years brought us to our present impasse. It is as though the nation's largest team of firefighters, overcome by the heat of the house fire, was determined to hand back responsibility for its containment to the arsonists who initially set the fire. It is literally the politics of madness.
Treasury's long-awaited Reforming America's Housing Finance Market: A Report to Congress said this, among other things
Going forward, the government's primary role should be limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response....Under our plan, private markets - subject to strong oversight and standards for consumer and investor protection - will be the primary source of mortgage credit and bear the burden or losses.....The government must also help ensure that all Americans have access to quality housing that they can afford. This does not mean our goal is for all Americans to be homeowners.
Really -- robust oversight and private markets? Is that wise in a context such as this: a context of housing crisis, failed oversight, a racially structured housing stock, and a record of inadequate help to those losing, or about to lose, their homes? Is that the best we can come up with when...
1. ...we are in the midst of an on-going and major housing crisis. It is one both of house repossession and of negative equity. More than one million homes were repossessed in 2010, part of the 3 million homes taken back in this way since 2007; and the rate of repossession is currently quickening -- we can expect the major banks to have repossessed close to 100,000 homes this January alone.
Moreover, at the end of September 2010, almost one American house in five (22.5 percent of the total) remained "under water" -- remained, that is, worth less in market terms than the mortgage currently outstanding on them. The number of houses underwater in this way did fall in the third quarter of 2010 -- from 11.3 million in January to 10.8 million in September: but that fall was not the result of house prices rising. It was the product of banks becoming more aggressive in their foreclosure practices. "Already, U.S. housing prices have fallen further during this economic downturn (26 percent) than they did during the Great Depression (25.9 percent);" and those house prices apparently still need to fall by "another 20 percent just to get back to the historical trend line."
They are currently doing so, and with gusto. The Wall Street Journal's quarterly survey of housing market conditions found prices declining in all 28 major metropolitan areas tracked in the last quarter of 2010, with inventory levels rising in many such markets. The result has been a price: income ratio that is at long last back to pre-bubble levels. Housing has become a buyer's market again -- which is fine if you can meet the new and tighter credit standards, but a nightmare, of course, if either you are selling or if you cannot meet the new credit requirements. Clearly not everyone can: "approximately 11 percent of all homes in the United States are currently standing empty."
2. Equally troubling, though currently tucked away behind the numbers (and the suffering they represent), remains the ongoing saga of bank malpractice. "Robo-signing" was big news in the third-quarter of 2010, but it has fallen out of the public spotlight since. A number of major banks temporarily froze their foreclosure programs in October 2010, you may recall, as more and more evidence accumulated of their sloppy accounting practices and inadequate documentation. Senators wrote letters of complaint. House committees summoned bankers to explain. But that was before the mid-terms. In the different atmosphere of a Republican-controlled House, the political spotlight has turned elsewhere; banks (including Bank of America, servicing roughly one mortgage in five) have quietly settled out-of-court with both Fannie Mae and Freddie Mac; and the foreclosure frenzy has begun again.
Yet bank delinquency remains a matter of court review. The Massachusetts high court ruled in December that Wells Fargo and U.S. Bancorp could not foreclose on two properties because they had failed to prove that they actually owned the houses. They lacked the paperwork. Any general ruling of that kind would inevitably destabilize the banking system again, creating a new and hard-to-isolate set of toxic assets -- which is presumably why, this far at least, far from co-operating with legal challenges, the banks are reportedly "pushing the problem under the rug" and the Obama administration remains unenthusiastic about further foreclosure freezes.
3. The latter is not entirely surprising, given that existing administration policy continues to be inadequate to the task. We have commented on this inadequacy on this website before. The Home Affordable Modification program (HAMP) was launched in 2009 with the intention of helping three to four million home owners. So far it has reached less than 530,000. "About 470,000 homeowners received loan assistance in the third quarter, down 17 percent from the second quarter and down 32 percent from the same quarter a year earlier," according to a federal bank regulator report issued in December 2010. HAMP's 521,630 people helped by January 2011 pales into insignificance when set against the more than two million loan modifications made by U.S. banks outside the government's program, or the 2,896,806 eligible delinquent loans still in existence.
But how could it be otherwise when the prevailing view at the U.S. Treasury would appear to be that the problems of the housing market had much to do with excessive government intervention rather than with too little? By year's end, Treasury Secretary Geithner had released $231.5 million to banks to facilitate mortgage modification, but not a single dollar to help borrowers' hire lawyers to fight their evictions -- and this, in spite of heavy pressure from Congressional Democrats. The Geithner mindset was publicly on show last Friday, when he said this at the Brookings Institution seminar on the new Treasury/HUD report on the future of the GSEs: "I think it is the case that the U.S. government provided too much support for the housing market, too strong incentives for investment housing, and we just took that too far.... And so absolutely the government did too much, and what it did, it did quite poorly."
4. This mindset is not his alone. Three Republican-nominated members of the Financial Crisis Inquiry Commission broke rank with their fellow commissioners in December to place the bulk of the blame for the 2008 credit crisis on government policy and on the GSE's: "third and most important," as they put it, "during the bubble's expansion the largest investors in the mortgage market....Fannie Mae and Freddie Mac, were instruments of U.S. government housing policy."
Through the GSEs and other avenues, "....the government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers." The same Republicans repeated that charge in a dissenting note to the Commission's report, published in January. A fourth, Peter Wallison, even added an extra dissent of this own: insisting that "the sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans -- half of all mortgages in the United States."
And yet the Commission majority was very clear that Fannie and Freddie did not cause, though they helped amplify, the nation's worst financial meltdown since the start of the Great Depression. In line with the bulk of balanced commentary on the way the housing market triggered worldwide financial instability, the majority report focused on the role played by the inadequate regulation of a private sector driven by greed and arrogance -- the very private sector to which Tim Geithner suggests Fannie and Freddie's role in mortgage underwriting should eventually be handed. The majority report said this on the causes of the crisis:
We conclude this financial crisis was avoidable....We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets....We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis....We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis....We conclude the government was ill-prepared for the crisis, and its inconsistent response added to the uncertainty and panic in financial markets....We conclude there was a systemic breakdown in accountability and ethics....We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis....We conclude that over-the-counter derivatives contributed significantly to the crisis...[and] we conclude the failure of credit rating agencies were essential cogs in the wheel of financial destruction.
This too, from the majority report, on Fannie and Freddie's role in that crisis:
We conclude that these two entities contributed to the crisis, but were not a primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool's gold.
5. By writing out of the script any possibility of the government maintaining and using Fannie May and Freddie Mac, the Obama administration is again demonstrating its move to the center -- its preference for the indirect regulation of private financial institutions over their direct control through publicly owned ones.
That move is likely to be economically ineffective and politically disastrous for its practitioners. Political disaster certainly looms: chasing Republicans only invites them to run harder; and in the process genuine reform is blocked. Unless housing policy changes dramatically -- with co-ownership offered to mortgagees under water, and direct housing assistance to those thrown out of work - the number of foreclosures will continue to grow. And presumably there will be very few Democratic votes coming in 2012 from houses and families abandoned to their fate throughout the Obama presidency.
Moreover, a depressed housing market will continue to slow the rate of general economic recovery -- keeping unemployment unnecessarily high at the cost of yet more electoral unpopularity in 2012. We are in the middle of the greatest housing crisis we have known, and yet the president failed to make a single reference to it in his State of the Union Address. We are in the middle of the greatest housing crisis we have known, and yet the administration's White Paper offers only medium-term scenarios of government retreat from a housing market desperately in need of active public policy -- scenarios that take the government out of the mortgage underwriting business rapidly, more slowly or more slowly still, but always out.
The immediate effect of the implementation of any of those scenarios must be a significant increase in the costs of house purchase. It must therefore bring with it the further exclusion of the American poor, and of people of color, from the possibility of house ownership. Perhaps someone in the administration should face up to the reality that such policy may win immediate Republican plaudits but can only bring one more critical foreclosure down the pipe: foreclosure on the White House itself. People are losing their homes and jobs daily. Unless they stop doing so, President Obama is likely to lose his home and his job too.
He shouldn't want that, and nor should we. Hands up anyone sane who wants the Tea Party in power! I certainly do not. It is surely time for the Obama administration to put its house -- and its housing policy -- in order, before it is too late.
First posted with full notes and citations at www.davidcoates.net