The New York Times editorial board is sellling the hype over the housing recovery. They stress that even with the recovery we’re seeing in home prices and sales, we are pretty far from what would be considered a normal market. In addition, the structural problems with the housing market persist.
High unemployment, poor jobs, stagnating wages and tight lending standards keep buyers away, while many sellers — especially the estimated 13 million homeowners who owe more on their mortgages than their homes are worth — are waiting for a price rebound [...]
It took the prospect of running for re-election in a weak economy for President Obama to wake up to the economic drag of a depressed housing market. Antiforeclosure policies were put forward in the early years of his presidency — mostly aimed at reducing monthly mortgage payments — but they fell short, hampered in large part by a shield-the-banks approach that precluded mass loan modifications. In the past year, the administration has revamped some programs and advocated for others, including refinancings and principal reductions for hard-pressed borrowers.
A slow recovery in housing is better than no recovery, but a slow recovery is extremely vulnerable to economic setbacks. What’s needed is above-average growth to pull housing and the economy out of the hole left by the recession, which requires more government relief and stimulus programs.
What the NYT ed board ignores is that the conditions generating this housing recovery are not at all positive, including a bubble in private equity house-flipping and artificially constricted supply due to shadow REO. But in general, they’re not getting too optimistic about this housing recovery everyone’s selling.
The editorial claims that Mitt Romney has no plan to deal with the housing market. Josh Barro disagrees, seeing a secret economic plan to deal with housing in Romney’s choice of economic advisers. Glenn Hubbard has endorsed a mortgage restructuring approach that would actually reduce principal for underwater borrowers. Of course, there’s the inconvenient matter of the whole tax time bomb for principal reductions, but presumably, if Romney wanted to do this, he could get a Republican Congress to administer an extension of the Mortgage Forgiveness Debt Relief Act. However, Mike Konczal makes the point that Hubbard dropped his endorsement of principal reduction last year, and now his plan looks more like what the Administration has already done, by tweaking the HARP guidelines to allow more refinancing for underwater homes.
Konczal’s piece effectively lays out the options for how to execute an actual policy of debt forgiveness and foreclosure mitigation. The chart below is a good shortcut explainer:
So far, we have used the “nudging the current system” policy mechanism with HAMP, and it totally failed. We are using the GSEs for refinancing mortgages, and after a slow start that is showing some results. There’s a fifth channel, actually, related to “nudging the current system,” which is the use of the penalties for foreclosure fraud and robo-signing to get additional debt relief, but those are finite and small.
All the other boxes are not being filled at the moment. Jeff Merkley’s plan remains in the development stages, cram-down is dead, eminent domain hasn’t gone past the discussion phase, and the GSEs shot down principal reductions. Of these eight boxes, until early this year we really only saw policy on one of them, and HAMP was not only disappointing, but it was manipulated by the banks so that government actively participated in a predatory lending scheme. Konczal writes:
We often don’t get second chances in life, but the Obama administration had a second chance at a serious reform of this broken system when news of the scandals surrounding financial fraud started breaking. Though there’s still a taskforce out there somewhere, I think it is safe to say the administration wanted to remove these problems rather than take them on directly, which would have opened up a space to reform the current system. They succeeded. This only leaves working through the system.
Maybe your eyes roll when you read the term “neoliberal hegemony,” but there’s something to the idea that the Obama administration simply felt that the only legimate way to try and deal with the foreclosure crisis was by nudging the incentives of various markets this or that way. The market is the ultimate, efficient arbiter of value, and policy should only seek to adjust some incentives here and there. Measures to intervene directly by the government, or measures to change the way property is regulated through bankruptcy, were ignored right away. Those actions require the government to act as a force in the marketplace directly, or to acknowledge that the economy is created through law and can be adjusted accordingly, both of which are taboo under neoliberal economic ideology.
Ultimately, Konczal concludes that Romney is in no position to challenge the system of power that Obama meekly succumbed to. And I agree with him. But it doesn’t exactly make this President look good, even by comparison. Simply put, we need government to act boldly to reset the housing market, and five years after the crisis began, we’re only getting scratches of the surface from both of the major parties.