Forgotten Americans – Homeowners

The Forgotten Homeowners

It is campaign season again, and the major parties are rolling out their time-honored bromides to salt-of-the earth Americans. The folks that labor long hours, raise families and scrape to save for a child’s education or retirement. Americans who work very hard and play by the rules.

These idealized Americans are the focus of every campaign. But since 2008, this group, this bedrock of our country, has been royally screwed by the politicians it has elected to represent them, and the special interests of the private and public sector that prey on them.

It is time to recognize it and make a change.

Average Americans did not create the 2008 financial crisis or its underlying mortgage crisis, but they have paid for it, many times over.

Having played fast and loose at the altar of ever appreciating real estate prices, Wall Street financial firms – partly for profit, partly to meet Washington diktats for fair lending – created a financial crisis that threatened to crash the global financial market and the American economy in a matter of days.

To save the US from the colossal malfeasance of Wall Street and its enablers,  US taxpayers ponied up $700 billion in bailout money. In addition, the Federal Reserve responding to the credit crunch separately, eventually flooded the market with nearly $2 trillion in liquidity for ailing financial institutions.

Very distasteful, but ultimately necessary to stabilize financial markets.

But the crisis had immediate knock-on impacts for Americans and the economy as a whole.

Companies cut back, consumers cut back, unemployment soared and economic growth collapsed into recession. This cascade from Wall Street to Main Street created an existential crisis for average Americans that exists to this day – housing.

Much was made of predatory lending practices and those Americans who either gambled or were fooled with sub-prime mortgages.  But the crash in housing didn’t just hit the sub-prime market – it hit America, in all regions and economic tiers. It hit average Americans the worst, those for whom a home was not just “shelter” as the smug Wall Street Journal put it, but a primary investment which, through gradual appreciation over time, could pay for college or secure a small business loan or provide for retirement.

After the crash, that “dream” vanished as housing values plummeted. In 2006, the value of residential real estate in America was $22.5 trillion.  By 2011, that figure had dropped an astonishing 30 percent.

Today, almost four years since the ’08 crash, more than 11 million American homeowners owe more than their houses are worth. High unemployment has fed the unvirtuous cycle with homeowners, unable to make payments on their homes, who have suffered the indignity of foreclosure, or have abandoned their homes outright.

Harvard University’s Joint Center for Housing Studies has reported that as of June 2012, 2 million homes were in some stage of foreclosure with more facing a similar fate. The number of borrowers delinquent on their mortgages remains at historical highs, with the knock on impact of an every increasing number of Americans closed out from credit markets due to collapsing FICO scores.

All totaled, according to a recent report by the Federal Reserve, US household net worth fell nearly 40 percent between 2007-2010, essentially wiping out 18 years of gains, most of it associated with lost housing value.

So what was the reaction of government and the financiers to this massive destruction of wealth across the board?

Nothing.

Not officially, of course.

Officially, the Fed kept interest rates at historic lows to promote bank lending. The new Obama administration created a $50 billion HAMP program to help homeowners.

In practice, the banks apparently had no intention of lending money out in any meaningful way, with new, revamped and much tougher credit standards. It was much easier to take the cheap Fed money and put it in the stock market for a higher return than risk it on the purposes for which it was ostensibly designed.

As far as HAMP and other, similar government initiatives, they suffered from bureaucracy and an exclusive focus on keeping the most most delinquent in their homes. There was no assistance for the broader market of borrowers who, through great exertions, stayed current on payments. Indeed, it is a surreal pre-condition of government help that you be delinquent in payments and at risk of foreclosure, with damage to your credit score already done, placing the borrower at a significant disadvantage.

Worse, the situation was seriously compounded by the banking-mortgage lending sector.

The banks may have required a bailout for the liquidity crisis of their own making – shredding the free market cornerstone of “moral hazard” – rewarding bad behavior –  but with financial markets stabilized, the banks came after homeowners with a vengeance as if the crisis that created the mass property devaluation had nothing to do with them.

Lost in the new foreclosure mania was the essence of the contract between borrower and lender.

In the boom times, borrowers may very well have banked on future appreciation. But the lenders were hardly without complicity. They bought into lax credit standards and unsupportable property assessments themselves. As an industry, they profited on creating as many mortgages as possible and selling them just as quickly, making a hash out of any proper sense of property title. And it was in the packaging of those mortgages into securities which ultimately brought on the financial crisis, that in turn tanked housing values.

In sum, the lenders played an outsized role in creating the crisis, but it was the homeowner who bore all the downside risk after the 2008 crisis. The lenders took none and no one in public office held them to account. Indeed, lenders redoubled their efforts to crack down, using corrupt and unethical practices to force people from their homes.

That is the existential crisis.

US taxpayers waived moral hazard to bailout banks despite their bad behavior. And Wall Street, by most estimates, is back. Profits are up, bonuses are large. The biggest banks in 2008 are even bigger today.

But when it came time to address the wreckage in the housing market created by Wall Street, financiers and politicians looked the other way.

There would be no concerted effort by the lenders to meet mortgage holders half way, to stop the hemmorage in the housing sector. Wall Street may have crashed and been saved by taxpayers, but from the lenders point of view in 2009, nothing had changed for the borrowers, who still owed for all their obligations, despite the radically changed circumstances.

And government?  Well, government had bigger fish to fry.

The Obama stimulus was a bonanza for the President’s union backers, but not for homeowners.

Then the Democrats moved on to Cap & Trade, Card Check legislation and eventually health-care. Nothing for homeowners.

Republicans were no better.

Any suggestion that industry or government should intervene to push for renegotiated mortgages that wrote down principle and interest were quickly accused  – with more that a bit of irony – of violating moral hazard, even though it wasn’t the vast majority of the 11 million American underwater mortgage holders who created the problem to begin with. Indeed, the GOP apparently wants faster action on foreclosures to clear the backlog and allow the housing market to return to “normal.”

 No help coming from this quarter.

And no organic political movement has taken up to advocate for the rights of homeowners.  The Tea Party certainly does not support mortgage relief if government dollars are involved.  That the Occupy movement would simply write off all debt makes a credible debate on the housing market that much more difficult.

And this flat rejection of anything that hints at real relief for homeowners misses the manifold benefits of such action.

-Renegotiated mortgages would provide a sound pool of capital for proper securitization in the debt market, allowing for additional, credible market liquidity.

-Renegotiated mortgages would sharply curtail delinquencies/foreclosures that in turn will place a floor under housing prices, and provide a foundation for housing market growth.

-Renegotiated mortgages with principal and interest reduction – 30 year notes at today’s low interest rates, would a create a fresh pool of capital to fuel consumer demand.

-Renegotiated mortgages would allow a large segment of otherwise creditworthy Americans who had seen their credit scores, and thus access to credit, evaporate, creating new, sound demand for loans.

-Renegotiated mortgages would return the home to investment status for average American families, improving consumer confidence and growth in the housing market.

-Renegotiated mortgages would help the housing industry, which is currently at Depression era levels, supporting a sector of the economy worth about $2.7 trillion.

-Renegotiated mortgages would return a measure of certainty to municipal and state revenues – largely based on property taxes, which have collapsed over the past four years and remain uneven given foreclosure activity and abandonment, which impacts neighborhood values, even for those who are current on their home payments.

But none of these dynamic, growth enhancing measures will be realized as there is no impetus in business or government to take the risk of proposing a concerted market correction for housing.

The Washington Post has reported that the total amount of negative equity on loans for the 11 million Americans who are underwater is roughly $700 billion.  That’s the exact amount that was given to the banks under TARP. It is less than the $860 billion that the Obama administration provided in the wasteful and misdirected 2009 stimulus. It is far less than the $5 trillion in debt that the nation has borrowed since 2009 to trigger a durable economic recovery that has yet to take shape.

Yet that negative equity is the key to a real recovery in the American economy. A point that seems lost in the debate about the economy and the future.

Oh, and the banks that the taxpayers bailed out in 2008? 15 of the largest – many of them recipients of our collective largess in 2008 – had their credit ratings downgraded this week, even as they continue to prey on homeowners – the very taxpayers who enabled their survival.

It is enough to make you scream.

We have 130 days to let those who want to run the country know the best way to fix it.

 

 

 

 

 

 

 

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