With Europe suffering under self-destructive austerity and the United States facing its own prospect of punishing budget cuts, it is easy to forget that the housing bust has been the biggest drag on the economy over the past five years. Even with recent housing market improvements, sales and construction are still at very low levels, while prices are still falling in most areas.
Worse, those signs of improvement may not be sustainable. One reason is that millions of foreclosures were delayed from late 2010 until this year, as banks wrangled — and eventually settled — with government officials over foreclosure abuses. With the legal issues now out of the way, foreclosures have resumed, with another 5 million expected between now and 2015, in addition to more than 5 million homes already lost, according to Moody’s Analytics.
If the economy were strengthening, the price declines from more foreclosures could be limited by an influx of first-time buyers and real estate investors. But with the economy slowing again, housing could also relapse, with falling prices provoking more defaults, foreclosures and distress sales, and ever-lower prices.
That dark scenario was a factor last week when the Federal Reserve downgraded its economic outlook, citing a housing market that “remains depressed.”
Policymakers need to take steps now to prevent a renewed housing downturn, along these lines:
Refinancings: Millions of homeowners have been unable to refinance their high-rate mortgages despite constructive moves by the Obama administration to relax the rules on refinancings in its mortgage-relief programs. Part of the problem appears to be foot-dragging by banks that want to keep borrowers paying at a higher rate. A bill by Sen. Robert Menendez, D-N.J., would help break the logjam, in part, by ensuring increased competition among lenders. The challenge, as always, is how to pass needed measures in a hyperpartisan Congress. President Barack Obama should be making it clear to voters that efforts to impede refinancing condemn homeowners to paying above-market mortgage rates.
Loan modifications: Under the recent foreclosure settlement, big banks are supposed to provide some $10 billion worth of principal reduction to some of the millions of borrowers who owe more on their mortgages than their homes are worth. One concern is that banks will tailor the relief in ways that help them clean up their balance sheets, while leaving many homeowners deeply underwater. Obama administration officials must be unflinching in their assessments of banks’ performance and ensure that noncompliant banks are punished.
Law enforcement: The foreclosure settlement allows for further investigation into banks’ mortgage abuses. In January, Obama vowed to begin an expanded inquiry, but there are scant signs of progress. The Justice Department has confirmed that 100 lawyers and staff members from various state and federal agencies are working on the investigation, a skeleton crew compared with the banks’ armies of lawyers. Only recently did the department convene a two-day meeting for lawyers, regulators and other experts involved in the inquiry to discuss cases, legal theories and strategies. Coordination is important, but it seems a far cry from a hard-charging prosecution, especially as potential violations draw closer to expiration under statutes of limitation for financial crimes.
Obama has promised an investigation with real accountability. There is still time, but he has not yet delivered. Meanwhile, with the possible exception of a eurozone meltdown, the housing market remains the largest threat to economic recovery.
The New York Times