Stabilizing the housing market is the first step in remedying other critical factors weighing down the economy, in particular high unemployment and decreased consumer spending. For the vast majority of families in the United States, their home is, or for some was, their largest financial asset. Considering the average American consumer has lost roughly 30% of their home’s value in the past 4 years, it is understandable that consumers would reduce spending. It is also logical to think that they will be hesitant to start spending again until they are confident that their home’s value will not continue to depreciate.
Many of these consumers are also small business owners who are hesitant to spend money hiring employees and beefing up payrolls until their home’s value stabilizes at a minimum. Considering these small business owners employ just over half of all private sector employees, it is imperative that they are confident in both their financial positions and the general economy before hiring new employees.
Now that we have diagnosed the symptom to the current economic disaster, let’s address a critical question: What can be done to improve and help stabilize the housing market? The answer is simple… cooperation primarily from banks, Fannie Mae, Freddie Mac and the Federal Housing Administration. Banks are intentionally slowing the amount of time they take to foreclose on home owners in order to slow the losses they are required to report on their balance sheets. Banks hope that by slowing these “write downs”, they can offset their losses with profits in other areas. This is a recipe for a slow demise for the banks and the economy in general, considering the trillions of dollars in write downs banks have not yet accounted for which will eventually have to be recorded on their balance sheets.
In some instances, banks have not recorded foreclosures or even begun to market them from consumers who walked away from their homes at the height of the credit crisis in 2008. This means that while a particular neighborhood may have begun to appreciate considering housing payments are the most affordable in history relative to household income, banks foreclosure sales of primarily distressed properties, bring values back down. This pattern will continue for many years until the number of home owners who have mortgage balances greater than their home’s value is drastically reduced. Many potential homebuyers who could afford to and would otherwise be in the market to purchase are deterred from doing so because they believe that foreclosures could continue to drag home values lower.
In my opinion, the most effective way for the economy to begin to recover is for banks to reduce the amount of debt homeowners owe on their mortgage to what comparable homes in the neighborhood are currently selling for. Instead of lowering a borrowers mortgage balance to what their home is worth, many banks are instead lowering and fixing in a borrower’s interest rate for 1 to 5 years until a certain point when it is subject to adjust. When the borrower’s adjustable interest rate increases at the end of its fixed period, many of them will still owe significantly more than what their home is worth and will be unable to refinance into an interest rate fixed throughout the life of the loan. When interest rates eventually increase, whether it is 3, 5 or 10 years from now, so will “underwater” borrowers’ mortgage payments rendering them unable to afford the increased payments and force millions more to foreclose within the next 10 years.
Banks are forced to “write down” the difference in what a homeowner owes them after foreclosing and what they are able to sell the home for. Banks are not only destroying the economy, but are destroying themselves by not collecting mortgage payments from the many millions of homeowners they foreclose on who would have been able to afford a mortgage payment at the market price of the home. Instead of allowing the homeowner to continue making interest payments at a reduced debt, the bank is forced to sell the home for the market price anyway, and usually for less than the market price was on the day the home became vacant.
Now that the bank has foreclosed on the owner, increased their inventory and eliminated another person from paying them interest on a loan, they have to deal with selling the foreclosed home, many of which deteriorate in quality and become infested with mold after not being cared for many months or years. The homes value is further dragged down compared to its value the day that the bank decided to foreclose on the owner instead of lowering the borrower’s debt while the home was still habitable.
Banks are ultimately reducing the amount of interest they are able to collect from U.S. consumers by foreclosing on them after rendering them ineligible to qualify for a new loan to purchase another home. The increased inventory of foreclosed homes combined with the decreased amount of potential “qualified” home buyers that have credit reports now unworthy of purchasing a home, further deflates housing prices.
In order for the housing market and ultimately the economy to improve, borrowers’ balances need to be reduced in a relatively short time. It is unfortunate that the government will need to offer banks “incentives” to reduce homeowner’s loan balances to the amount the property is worth. If the government does not intervene and provide incentives for banks to work with homeowners, banks will continue to drag out this process for many years and millions of homeowners will continue to foreclose. While some may view this as a bank and consumer bail out using hard working tax payer money, this bail out is the only way to stabilize the housing market which will eventually lead to reduced unemployment and increased consumer spending, which will ultimately improve our dismal economy and benefit these skeptics as well.
In addition to providing a stimulus offering banks incentives to reduce underwater homeowner’s loan balances, the government needs to address the millions of fiscally responsible people who fell victim to buying at the peak of the market and/or were put in adjustable rate loans. These otherwise well qualified buyers do not have adequate credit reports to qualify for a loan to purchase a home. Considering home values are now less than they were 10 years ago in some areas, there are many people with full time jobs and adequate down payments to purchase who simply have poor credit because they were forced to foreclose due to the massive decrease in their homes value. The Federal Housing Administration (FHA) will not provide a loan to a borrower who has foreclosed in the previous 3 years. In many cases, these potentially well qualified home buyers have credit reports that are past the point of no return and are unable to qualify them for a loan even after this mandatory 3 year seasoning requirement.
A common misconception is that the sub-prime mortgage crisis was primarily attributable to lenders providing loans to borrowers with poor credit. This is incorrect. A person’s credit score is not indicative of their willingness or ability to make a payment in my opinion. Many consumers’ credit scores have dropped to “sub-prime” levels because of a neglected parking ticket. The sub-prime mortgage crisis was primarily attributable to lenders providing loans to borrowers without documenting their income or requiring them to put any money into the purchase of their home. The FHA could provide a huge boost to the economy by loosening their credit requirements and providing loans to consumers with sufficient income and down payments that purchased at the peak of the market and/or were put in bad loans.
The US government has provided trillions of dollars in misused bail out money to banks and for fiscal stimulus programs that have failed miserably since the credit crisis in 2008. It is time to address the underlying problem in today’s economy and focus directly on improving the depressed housing market by lowering underwater borrowers mortgage balances and providing loans to potential homebuyers with sufficient income and down payments who unjustly fell victim to bad loans and extremely depreciated home values. If there is relatively little demand to purchase at a time when interest rates are at an all time low and home affordability is at an all-time high, imagine how the economy will be affected when interest rates increase in order for the US to stay competitive in the global economy. If the US government does not implement a drastic stimulus focused on stabilizing home values and creating a demand for homeowners to purchase the excess supply of homes in the country, it may be time for us all to begin learning how to speak Chinese.