The Housing Plan
The next component of the ongoing economic policy roll out is the housing support announced by Obama yesterday. The real estate business is the epicenter of our current crisis so calming things down in housing is essential to the success of the whole economic recovery plan.
Here are the details of the plan, from this morning’s New York Times:
Obama Housing Plan Tries to Slow Downward Spiral
The plan attacks the problems of two major segments of home owners.
First are those who have what are called ‘conforming’ loans. These are mortgages that conform to the standards of Fannie Mae or Freddie Mac. They are, by definition, not sub-prime. One of the mistakes we can all make is to focus our attention too much on the sub-prime loan market. Those are the loans that were typically made by companies like Countrywide, and had the most foolish of standards. Those low lending standards are what made the loans sub-prime aka ‘nonconforming’.
But even borrowers who put in proper down payments and are current on their payments are having difficulties. Usually this is due to the drop in home prices wiping out the equity they originally put in and so rendering the borrower unable to re-finance. So part one of the Obama plan is targeted to help these conforming loan borrowers. It does this by injecting a ton of money into Freedie Mac and Fannie Mae and relaxing the re-financing rules. The purpose here is to make it possible for borrowers to get smaller monthly payments and thus increase their financial security.
The second major plank of the plan is aimed at the sub prime market. The notion is that lenders should be encouraged to renegotiate untenable terms and thus accommodate the borrowers need to get smaller monthly payments. Frankly I would have liked the plan to include incentives for lenders to write down part of the principal as well, but this is a start.
Overall the plan will clearly have an effect on the housing market. It will ameliorate but not cure the foreclosure crisis which will help slow the decline in prices. It is the burst of foreclosures that has blown a hole in house values in some areas, so anything that slows the rate of foreclosures helps all homeowners, not just those in financial trouble.
So by mobilizing and enabling both refinancing and loan modification the plan goes about as far as it can toward stabilization of the market.
Problems with implementation will arise where lenders think that the costs of renegotiating are high with respect to the costs of foreclosing. In those instances they will still foreclose. The plan has no compulsory component preventing this, so I imagine in some parts of the country, depending on local laws etc, foreclosure will still be commonplace.
Lastly, and by way of a rant, I find it somewhat galling that we continue to extend all sorts of privilege to homeownership. This country’s obsession with housing got us into the current mess. We have long given homeowners all sorts of tax breaks which has skewed investment toward housing with the recent bubble in values being one result. Now we are extending even more welfare to help people keep homes they probably should never have bought, and may not have done had it not been for the tax breaks. This has long been one of my gripes about the economy. The idea that this housing rescue plan targets mortgage payments of above 38% of income as ‘unaffordable’ is a massive insult to all those renter out there for whom 40% has become the norm. That 38% is before tax, but that 40% is not even a factor in the tax calculation. No wonder we have a lop sided housing market with too little good quality rental units available and a massive over supply of single family homes no one can afford.
The writer Richard Florida has an interesting article on this subject in this month’s Atlantic Monthly magazine, here: Reshaping America . I often disagree with Florida on some of his more sweeping ideas, but in this case he’s right. We need to rethink the notion that homeownership is an integral part of the ‘American Dream’. It places too much emphasis on real estate and not enough on lifestyle. Besides, a population that is tied to housing is less flexible, it cannot react to new job opportunities as well as a renter population can. The more homeowners we have the less mobility we have. And right now we need flexibility as we reconstruct the economy.
Just another part of our mythology that needs to change as we rebuild from the Reagan era?
Addendum:
The housing bailout is, predictably, attracting a lot of flak from right wingers who rant against taxpayer money being used to help ‘losers’ – that’s the word used by CNBC correspondent Rick Santelli who delivered his own rant from the floor of the Chicago Mercantile Exchange home to some of those mortgage backed security traders who we have come to love so much.
Now, as I have pointed out I am highly open to any suggestions that downgrades homeownership in the economic scheme of things. And I understand fully the issues surrounding moral hazard with respect to allowing people to avoid contracts they entered into freely. But, there is also such a thing as a community impact from the housing disaster. If enough homes are foreclosed upon in an area then even fully current and respectable homeowners can see their wealth eroded quickly. It is the attempt to reverse this downward pressure on the so-called ‘wealth effect’ that I can see as the justification for the plan. We need people to feel secure and that their wealth is not diminishing so that they can get back to spending.
We have a terrible and gaping consumption problem. The housing crisis contributes to it. Therefore we need to mobilize against the housing crisis for the other actions we are taking – like the stimulus package – to have full effect.
Were this simply a bailout of ‘losers’ I would be opposed.
And, please, let’s get over this homeownership thing.
