- The Washington Times - Tuesday, February 16, 2010

ANALYSIS/OPINION:

“We haven’t yet found a way of dealing with this.”

- Assistant Treasury Secretary Herbert M. Allison Jr. on home mortgage loan modifications

Early in his term of office, President Obama set the standard by which voters should judge his administration, saying it would be tested by how successful it had been in ending the nation’s economic downturn.

Republican victories in New Jersey, Virginia and, more recently, Massachusetts, as well as the failure of congressional Democrats to pass Mr. Obama’s health reform legislation all go to illustrate that voters are dissatisfied with the Democrats, whom they perceive as ineffective. The most stunning example of the Democrats’ failure since Mr. Obama’s inauguration last year has been their inability to stop home foreclosures, which are projected to affect 19 million homeowners by the end of 2010.

In his recent State of the Union address, Mr. Obama made clear how he intends to resolve the home mortgage foreclosure crisis - namely, by ignoring it. He offered no options for distressed homeowners aside from their securing conventional mortgage loan refinancing at lower interest rates. However, because of the depressed housing market, millions of homeowners hold mortgage debts greater than the value of their homes; they are, as industry analysts describe it, “underwater.” Deutsche Bank has projected that 25 million, or 48 percent, of all homeowners will be underwater in their mortgages next year. Furthermore, diminished home values make conventional bank refinancing impossible because, sadly, the federal government’s TARP (Toxic Asset Relief Program) bank-rescue plan was never intended to help homeowners modify their mortgage terms.

Otherwise, it is difficult to understand how the Obama administration expects the economy to recover because high mortgage payments, when combined with declining home values, have further depressed the housing market that triggered the recession in the first place. Underwater homeowners are faced with a devil’s dilemma because they cannot afford their inflated mortgage payments or sell their homes at prices that will permit them to satisfy those homes’ mortgage debts. This leaves homeowners with effectively two options: resorting to so-called short sales (i.e. persuading the lender to accept a loss when the home is sold for less than the mortgage owed) or, worse, foreclosure, which is a process that affects an owner’s credit worthiness, similar to legal bankruptcy. The result of all this is that millions of homeowners will not only suffer eviction from their homes but also ruin their credit, which will curtail their consumer spending and further damage the prospect of general economic recovery. Moreover, the economic ripple effects of foreclosures cause neighborhood home values to plummet while at the same time diminishing municipal tax bases.

So far, Mr. Obama’s Home Affordable Modification Program (HAMP) has helped just 66,000 homeowners permanently modify their mortgages, while millions more remain on the brink of foreclosure. The president’s meager housing efforts are faulty in their conception because homeowners living in high-priced housing markets in states such as California, Massachusetts and New York are ineligible for the HAMP program. That is because they, according to the means test, hold mortgages priced above the program’s upper limit. Mr. Obama’s beleaguered housing strategy is perplexing, given that previous Democratic presidents created successful housing programs. For example, Presidents Franklin D. Roosevelt and Harry Truman assisted millions of working-class families in achieving homeownership by creating the Federal Housing Administration (FHA) mortgage insurance program as well as the FHA-VA program, which helped build military housing and helped millions of returning war veterans buy new homes. Although the homeownership rate fell last year to 67.3 percent, homeownership is still close to its all-time high of 68.1 percent in 2001.

During the Great Depression era, just four in 10 American households owned homes, and America was a nation of renters. In the 1940s, mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment, making mortgage terms difficult for most homebuyers to meet. The FHA encouraged lenders to create affordable 30-year mortgages by insuring lenders against mortgages lost to default. The FHA has insured more than 34 million properties since its inception in 1934. Furthermore, the FHA also was good politics, as working-class families who became homeowners remained loyal to the Democrats thereafter.

This lesson is not lost on all politicians. For example, Hillary Rodham Clinton, during her presidential nomination campaign, appeared to offer a bolder, macro-economic approach for solving the foreclosure crisis. Mrs. Clinton supported the idea of placing a moratorium on all home foreclosures to stabilize the decline of home values while encouraging lenders to modify mortgage terms to homeowners. Even Republican candidates such as John McCain got in on the act, promising to reset mortgages to the lowered market value of homes in order to assist underwater homeowners.

Inexplicably, the Obama administration has not fully used the FHA and other programs like it despite the fact that these programs have been used frequently over the decades to help both homeowners and lenders overcome difficult housing-market challenges. Creative financing ideas abound about how to help lenders modify home mortgages, such as “equity give-backs,” which permit lenders to share in a home’s appreciation when it is resold. Alternatively, there is the idea of having the FHA serve as the insurer of last resort (its current role) so as to protect lenders against losses that result from modifying the terms of a homeowner’s mortgage. In short, existing federal programs work in partnership with lenders to help homeowners escape mortgages they can no longer afford by transitioning them into a new housing situation without having to resort to obnoxious public policy solutions such as default, foreclosure or bankruptcy, all of which can only further imperil the recovery.

Sadly, the Obama administration has left distressed homeowners with few alternatives. This will make it difficult to solve our current economic downturn because, as in the Great Depression, housing construction jobs have disappeared in the depressed housing markets. It is bad enough that Mr. Obama and a Democratic Congress failed to agree on even a weakened version of health care reform. If the home foreclosure crisis continues unattended, it will transform the stream of Republican statewide victories into a tsunami of voter discontent headed directly toward the incumbents in Washington, namely, Mr. Obama and congressional Democrats.

William K. Barth is a California lawyer and worked for the Department of Housing and Urban Development from 1994 to 2002. He writes a blog for the Huffington Post.

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