SOURCE: AP/Gregory Smith
A foreclosed home in Westview Village, Atlanta, collects cobwebs Nov. 3, 2007. Like other neighborhoods with a significant number of foreclosures, Westview faces rising crime and falling property values.
Capitol Hill this week will be examining the many different consequences of the U.S. housing crisis on our economy amid efforts to pass critical legislation to help stem the worst consequences of a continuing freefall in housing prices. Conservative opponents of efforts to help responsible homeowners facing foreclosure are spreading myths about the pragmatic policy solutions to the crisis.
President Bush himself has led the charge, spinning again today that responsible legislation currently under consideration would “reward speculators and lenders," ignoring the fact that his administration’s own FHASecure program requires only a minimal haircut for lenders and imposes fees on troubled borrowers, as opposed to deeper losses for lenders who would also pay the closing costs and an insurance premium under the congressional proposals.
Conservatives are also fanning the flames of division, misstating the consequences of letting the marketplace sort out the crisis to home values across the country and to the overall economy. Here are five myths peddled by conservatives, and the facts that illustrate why Congress needs to act quickly on responsible housing legislation.
Myth: The housing crisis no longer threatens the economy.
Fact: The nation’s economy remains very much at risk.
Global financial markets are still dealing with some of the macroeconomic effects of the global credit crisis, which will not be helped by a continuing freefall in U.S. housing prices. Moreover, falling home values and new indications of declining consumer spending across a wide array of lending categories all suggest that the recession’s effects will be felt for the next few years.
Housing values and mortgage-backed assets remain at the heart of the credit crisis. A serious housing market correction, bringing the ratio of house prices to rents closer to its historic average, is essential to restoring confidence, but a radical over-correction will have the opposite effect. A reasonable effort to stem the vicious downward spiral that foreclosures have on house prices is the most important thing Congress can do to stabilize the real economy and prevent greater economic carnage from spilling over to more companies and families far from the subprime mortgage market.
Preventing additional homes from falling into foreclosure is crucial to preventing an over-correction, as each foreclosure puts additional downward pressure on house prices and adds to the inventory of unsold homes, further clogging local real estate markets.
Myth: The bill offers a bailout to speculators.
Fact: All legislation under consideration requires owners to live in the homes they want refinanced.
Speculative real estate investors who purchased homes purely for profit, not shelter, and did not live in them are not eligible for program participation in any legislation now under consideration by Congress. Arguments that this legislation rewards speculators are specious.
Myth: The bill offers a bailout to lenders.
Fact: To take advantage of an FHA loan guarantee, lenders and investors must take a “haircut” and pay closing costs plus an insurance premium up front.
Arguments that the legislation offers lenders a bailout are way off the mark. Institutional investors holding interests in mortgage-backed securities would need to write down the principal value of the mortgages they hold to no more than 90 percent of current value. They would also pay closing costs and a 3 percent premium at the time of refinancing borrowers into new loans to get the Federal Housing Administration credit enhancement envisioned in the legislation. They would trade the reduction in value and insurance premium for the certainty of being paid the new loan balance.
Myth: The bill offers a bailout to homeowners.
Fact: Under the House’s Homeownership Retention Mortgage program and the Senate’s Hope for Homeowners program, each part of the legislation now before Congress, individual homeowners would have to pay an ongoing insurance premium to cover the costs of the FHA credit enhancement.
While homeowners would benefit from reduced payments because of a lower mortgage, they would also have to share with taxpayers any upside gain they would otherwise get from the house upon resale or refinancing. Potential participants would need to qualify for the new loans being offered, based on their current income and indebtedness; not all existing homeowners at risk of default and foreclosure will qualify. The congressional approach shares the responsibility among all the parties to the mortgage, bailing out no one.
Myth: There is no need for Congress to act; the private sector’s Hope Now Alliance has been very successful in making necessary workouts.
Fact: Few borrowers have been offered substantive, long-term modifications to their loans. Moreover, a loan-by-loan approach to the housing crisis simply can’t address the scale of the need.
The Hope Now Alliance has relied overwhelmingly on repayment plans to tack on missed payments to the end of a loan. Only about one-third of all borrowers offered assistance by Hope Now’s servicers received any sort of modification to loan terms, and the modifications offered were not the five-year payment freezes hinted at by Secretary Paulson but short-term (three- to six-month) freezes on interest rate adjustments. Refinancing into new FHA-insured loans would provide borrowers with affordable, fixed-rate mortgages while providing lenders and investors certainty about the future payment stream.
The Senate version of the legislation provides for a mechanism to refinance entire pools or classes of mortgages in bulk or wholesale, permitting the Federal Reserve to establish an auction process that would allow the market rapidly and transparently to re-price existing mortgage pools, quickly refinance mortgages to avoid accelerating foreclosures, and restore needed confidence and stability to our financial markets. By acting at scale, rather than on a loan-by-loan basis, the program can work much faster than existing efforts.
Myth: The housing crisis only affects irresponsible borrowers, so taxpayers who struggle to meet their obligations shouldn’t pay for their mistakes.
Fact: The housing crisis affects all homeowners and even renters.
Each foreclosed property within an eighth of a mile is associated with a 0.9 percent drop in house values, with even greater negative consequences in low- and moderate-income communities. By preventing homes from falling into foreclosure, the legislation now before Congress will alleviate the downward pressure on local house prices felt by all, not just at-risk borrowers. Refinancing mortgages under the Hope for Homeowners program will help borrowers and their neighbors, who are innocent victims but are suffering lost equity and wealth nonetheless.
Foreclosed properties are also costly to local taxpayers who aren’t directly affected by declining property values. Untended properties attract crime, vandalism, and arson, which drain local resources and municipal budgets. As costs rise and property tax revenues fall because of declining values, towns will look to other homeowners to make up the shortfalls.
Finally, the housing crisis has had a significant impact on GDP growth and the real economy. It is estimated that the credit crunch and housing crisis has cut 2 percentage points from GDP growth, which translates into lost opportunities for job growth.
To read CAP’s legislative proposals and policy analysis on the housing crisis, please go to the Housing page of our website.