Fix Housing First
Troubles in the housing market are widely regarded as the trigger behind the current economic recession. Banks issued billions of dollars in risky mortgage loans to home buyers who later found they could not keep up with the payments. Families lost their homes, and banks tightened credit, making it more difficult for others to borrow money.
With analysts predicting that the number of homes going into foreclosure could reach four million this year, the housing downturn is still front and center in many consumers' and economists' minds.
The House Obama Built
After signing the $787 billion economic bill in Denver, President Obama was in Phoenix to unveil the Homeowner Affordability and Stability Plan. Even more ambitious than first expected, the plan commits up to $275 billion in funds to help reduce mortgage payments for up to nine million families and attempt to arrest the devastating fall in U.S. home prices. The plan marks a sharp departure from the Bush Administration, which relied mainly on having servicers voluntarily modify troubled mortgages.
Obama’s program targets two groups — homeowners who owe more on their mortgages than their homes are worth, and others who are right on the cusp of foreclosure. The highlight of the plan is a $75 billion program to encourage lenders to cut monthly mortgage payments for borrowers at risk of default, specifically to no more than 31 percent of their income. The Administration believes it could help as many as four million struggling owners stay in their homes.
The plan also doubles the backing to government mortgage companies Fannie Mae and Freddie Mac to $200 billion each.
Another major component of the plan would allow borrowers who have been making timely payments to refinance into safer and cheaper fixed-rate loans. Loans must be held or securitized by mortgage giants Fannie Mae or Freddie Mac, and the new mortgage and refinancing costs can't exceed 105 percent of current market value. In other words, if the house is worth $200,000, its owner may qualify if he or she owes $210,000 or less.
Critics are already noting that the Administration’s plan will push up interest rates on all future mortgages, even for people with excellent credit, and could create more losses for banks. As such, Republicans at the state and national level are likely to push forward with their own plans to alleviate pressures on the housing market.
Alternative Solutions
As part of the budget agreement, Governor Schwarzenegger recently signed SB 15xx (Ashburn) which provides for a non-refundable tax credit (up to $10,000) for the purchase of a qualified principal residence between March 1, 2009 and March 1, 2010.
There is currently at least six months of new construction inventory that has no corresponding demand. By motivating Californians to buy newly constructed homes that have never been occupied, the state can help stabilize the housing market and increase the need to build more new homes, thereby creating more jobs and revenue.
During negotiations on the federal stimulus bill, Senate Republicans on Capitol Hill offered two amendments directly aimed at housing which could be revived in coming days.
One, by Sen. Johnny Isakson (R-GA) would have provided a tax credit of up to $15,000 for homebuyers, double the current credit. Unfortunately, the Isakson housing tax credit was stripped out in conference after initially being adopted by the Senate. The second proposal was offered by Sen. John Ensign (R-NV) and would have provided for a fixed rate mortgage of somewhere between 4 and 4.5 percent over 30 years for mortgage refinancing or buying a new home.
Proponents believe a 4 percent mortgage interest rate would add an extra $175 billion per year of disposable income to households and thereby provide a significant stimulus to the economy. The change would save the average family $466 a month, or $5,600 a year.
An economic analysis released by the Fix Housing First Coalition demonstrated that these two housing stimulus provisions would over a four year period:
- Increase GDP by 1 percent annually;
- Create 940,000 new jobs annually;
- Increase average homeowner equity by $25,000 by 2012;
- Increase aggregate homeowner equity by more than $2 trillion by 2012; and
- Generate revenues at the federal and state level that would exceed the cost of the program.
Proceeding With Caution
Without question, the current housing debacle is not an easy problem to remedy. On both the national and state levels of government, careful consideration should be given before creating government policy aimed at providing generous subsidies and interventions to restore a level of ownership that many believe the market has just demonstrated as unsustainable even in good times.
The steadily increasing foreclosure rate may warrant a policy response, however the states and Congress alike must not rush into ill-conceived fixes that threaten to cause more harm than they would alleviate. To avoid that risk, proposals must be carefully targeted and proportionate to the problems they are intended to address.
While refinancing mortgages at very low interest rates would save the average family thousands of dollars annually, it would also be a costly initiative and a massive new government intervention in housing and finance markets.
There is no shortage of ideas and suggested remedies for the housing crisis. They range from tax credits and cheaper mortgages for home buyers, to working with lenders to rewrite mortgage terms for struggling borrowers. But we should ask what, exactly, fixing the housing market means--and prepare ourselves for the limits of what these policies can actually accomplish.
As painful as it is, the market is slowly working its way back to a sustainable outcome. Rather than risk adding to the turmoil in the housing and financial markets by applying overly broad prescriptions, consideration should be given to approaches that do not undermine investors' expectations and, ultimately, homeownership.
For more information on this report or other Housing issues , contact Ryan Eisberg, Senate Republican Office of Policy at 916/651-1796.
