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.

Posted by Jim Newton on Feb 15 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.