Why We Need a National Housing Policy That Is “Built to Last”

The worst housing crisis since the Great Depression now stretching into its fifth year has left homeowners demoralized and shellshocked.  And the anger felt on Main Street in part reflects the relative impotence of federal policy responses to address the number one asset held by most taxpayers. The statistics across the board are ugly.  The supply of real-estate owned (REO) properties has become a scourge on our neighborhoods and cities and is expected to rise several fold over the next two years as a wave of renewed foreclosure activity hits which already is 8 times what we would expect to see in a normal environment.

More than a fifth of all homeowners with a mortgage are indebted by more than the value of their property and more than a third of housing value has been wiped out since home prices peaked before the crisis.  Private capital has been effectively squeezed out of mortgage financing by virtue of Fannie, Freddie and Ginnie Mae accounting for the lion’s share of securitization.  For all of these enormous challenges, from a policy perspective, we have as they say brought a knife to a gunfight –  i.e., we have HAMP, HARP, and a few policy white papers to show for our efforts (for more views on this see the following links to recent media outlets on this topic):

We heard again from the President in his State of the Union Address on the steps the federal government is taking to refinance struggling borrowers. The lofty ideal for an America that is “built to last” certainly is inspiring and makes for memorable speech-making but the plain facts are that in terms of housing policy we are sorely lacking in anything approaching tangible solutions that will have meaningful long-term impact on housing markets.

The latest incarnation of refinancing efforts for underwater borrowers, HARP 2.0 is not specifically designed to stabilize the market since it does nothing directly to stimulate housing demand for new borrowers and investors or reduce stubbornly high inventories of distressed properties.  Moreover, for the 11 million potential borrowers that could be impacted by this policy, it would have a negligible effect on facilitating economic growth.  In the end, fixing the housing market is a zero sum game – there are winners and losers with significant ramifications for wealth redistribution that establishes unsettling precedents in private markets going forward.

 Principal reductions, while conceptually appealing in some ways introduces moral hazard and issues regarding the government’s role in appropriating property rights  - a very dangerous  and slippery slope. The Acting Director of FHFA, the overseer of Fannie and Freddie recently estimated that principal reduction modifications would mean an additional $100 billion tab for  taxpayers. The lack of tangible creative public-private solutions to the housing mess remain an enduring legacy from the crisis.  Erecting a solid foundation on which America’s housing can truly be built to last first requires commitment to a comprehensive housing policy that is long on effective policy responses and short on rhetoric.