Mortgages Underwater, Housing Recovery Stalled: Bring Out the Bulldozer
Posted by Kelly Huffor on Friday, September 23rd, 2011 at 1:46am.share the Houston Real Estate Blog!
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In recent months, discussions on the economy have been dominated by two topics: the national deficit and jobs. And rightly so. Mushrooming debt casts a pall on our long-term financial outlook and unemployment is a singular focus for anyone looking for a job. As the economy continues to sputter, though, many economists and analysts are reaching the conclusion that, just as the housing market was at the core of the economic crisis, it is also the key to recovery.
Currently, 1 in 5 mortgages is underwater; with these homeowners often pouring all of their resources into just keeping their homes, they often have little money left to put back into the economy. Foreclosed homes, which in some areas sit in limbo for months or even years, often fall into disrepair, taking surrounding home values down with them. Most analysts agree that home prices won't be able to recover until the "shadow inventory" of 1.8 million homes in foreclosure are dealt with in some fashion.
And of course, there are the million or so jobs which have been lost in construction and related fields, plus an estimated 3 million more jobs lost indirectly due to the housing slump. Given all this, it's hard to envision a true economic recovery that doesn't include a housing recovery.
So what can be done? It's pretty obvious that, so far, government efforts to help shore up the housing market have fallen short. The president's home modification program HAMP fell well short of targets, and the Homebuyer Tax Credits didn't so much bring in new sales as simply move existing sales earlier - at a cost of $16.2 billion in lost tax revenue, according to a BusinessWeek article.
The last time housing values dropped this much and this many homeowners were underwater was the Great Depression, and that led to drastic changes, including bailing out 20% of all U.S. mortgages and the introduction of the 30-year, fixed-rate mortgage. Similarly dramatic action seems needed today, or else we could be facing the same kind of stagnation Japan has endured since their housing bubble burst 15 years ago. CNN and TIME recently reported on the ideas being floated by economists and inside the White House to help stabilize the housing market and bring it back to life.
To help underwater homeowners, economists at Columbia Business School are proposing a mass refinancing for all government-backed mortgages through Fannie Mae and Freddie Mac. Since those who owe more than their homes are worth can't go through the standard refinancing process, this would allow such homeowners to take advantage of the current low interest rates, and lower their mortgage burden. Such a proposal is appealing, because it doesn't cost any taxpayer money and would save homeowners $85 billion by one estimate, money which could be pumped back into the economy.
Some are also suggesting mortgage principal write-downs to address the underwater issue. One proposal would involve government-subsidized write-downs to the tune of $200 billion, though it's likely a difficult sell in today's political climate. A more likely scenario is that write-downs would come from the private sector. According to TIME magazine, "Bank of America, Wells Fargo, JPMorgan Chase and others may soon be forced by state attorneys general, who are seeking a collective $20 billion in penalties for faulty lending, to write down some individual mortgages" as part of settlement deals.
Then there's the problem with foreclosures. While it may seem callous, some are suggesting the foreclosure process be sped up so that many loans in foreclosure can be finalized. The reason? Because in many parts of the country, the foreclosure process is drawing out over many months or years, while the homeowners - and homes - languish in limbo, essentially holding the housing market hostage.
In July 2009, 6% of delinquent homeowners were behind on payments for more than 24 months; by July 2011, that number was up to 37%, with another 34% not having made a payment in over 12 months. The longer a home is in foreclosure, the more likely it is to be lost, and while some can be saved, usually it's just prolonging the inevitable. By finalizing those which are seriously delinquent, the homes can be taken out of limbo and put back to use.
But what of all of those foreclosed homes, in addition to the excess supply already in the market? Communities like Cleveland and Detroit are taking the radical step of demolishing vacant properties, many of which have become havens for criminal nuisance. Of course, bulldozing three million homes is out of the question. A more optimistic scenario for dealing with the glut of homes is to let private investors purchase them and rent them out, and in August the Treasury Department solicited ideas for how such a program could work on a large scale. By reducing the number of homes for sale, the government hopes to stabilize the market and preserve neighborhoods on the brink.
Obviously, there are no quick fixes, and we'll need more than one course of action in order to restore a healthy housing market. But we will need action. Because, as we've seen over the last 3 years, a recovery which doesn't include the housing market is really no recovery at all.
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