Will government ever get its act together on housing?
Five years and counting … that’s how long the U.S. housing crisis has been going on, and so far the country has little to show for it. Millions of people have lost (or are in the process of losing) their homes to foreclosure and average home prices have fallen by approximately one-third from their peak. The government has initiated a number of programs to help Americans deal with the crisis — such as the Home Affordable Modification Program — but the results have been quite disappointing.
Just last week the federal government, along with 49 states, announced a settlement with five large financial institutions to remedy some of the injustices associated with the “robo-signing” problems of a few years ago. In total, the settlement will amount to some $26 billion in various costs to the five banks involved. It should be noted, however, that this is not a solution to the housing crisis, but rather a penalty associated with obnoxious activities carried out by these banks as they tried to fast-track their foreclosure activities without due process.
And even with this seeming huge settlement, the housing nightmares for most of the people involved will not end. Out of the $26 billion, the lion’s share ($17 billion) goes to those qualified who are both underwater on their mortgages and behind on payments. Unfortunately, this portion of the agreement only provides relief averaging about $17,000 for those owing more on their mortgages than what the homes are worth; which is likely far less than the amount most people are underwater in their mortgage obligations. So for these folks, the aid is of precious little value in practical terms.
Another $3 billion goes to help those qualified individuals who are current on payments, but need help qualifying for refinancing so as lower their mortgage rate and thereby reduce monthly payments. Some $5 billion goes to federal and state governments to allow a lump-sum compensation of $1500-$2000 for those who already lost their homes to foreclosure, with the final $1 billion representing fines for Bank of America to repay FHA for fraudulent activities by its Countrywide subsidiary. In each instance, it is a specific group of people who may be eligible, but at no point does it include those having mortgages backed by either Fannie Mae or Freddie Mac.
While some people will undoubtedly be aided by this settlement, it does nothing to influence the underlying problems in the housing industry. Had the housing crisis been solvable with a mere $26 billion outlay, the federal government would likely have ponied up the funds long ago. In a somewhat perverse outcome from the $26 billion settlement, it seems likely that with the robo-signing scandal behind them, these banks may now find clear sailing ahead to accelerate their present foreclosure activities, thereby placing more homes on the marketplace for sale as the year progresses, and driving home values down even more still.
As such, all of this begs the question as to what — if anything — the government can do, and when Americans might see real progress on the housing front?
Perhaps the logical place to start when addressing the above question is recognizing what the government is probably unable to do. Specifically, the federal government does not have the ability to undo a market catastrophe. Horrible decisions were made by a large number of housing market participants during the first several years of the 2000s, and those poor decisions must now be allowed to unwind. Without a doubt, a large share of the blame can be pinned on the likes of the Federal Reserve, asleep-at-the-wheel government regulators and pandering politicians who wanted to increase homeownership rates among their constituents regardless of ability-to-pay.
Certainly, as illustrated by the settlement discussed above, those institutions that engaged in unlawful activities must be held accountable for their actions. But such efforts will not reverse the basic market imbalances nor will those who suffered be made whole by such settlements. Sadly, millions upon millions of Americans who had no direct involvement in the housing nightmare might find themselves negatively impacted for many years to come by lower home values, lost jobs, depleted savings and significantly reduced standards of living.
So if government can do little-to-nothing to help those already decimated by the housing crisis, what might actually be achievable moving into the future? That question, and a possible solution, will be the starting point for next week’s column.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.