Ronald Reagan once said that the 10 most dangerous words in the English language are, “Hi, I’m from the government and I’m here to help.”
Yet here we are, some 30 years later, listening to Obama’s administration feed us that same tired and dangerous line.
In February 2009, President Obama told us he’s taking “unprecedented” action to solve the mortgage/housing crisis in America (if you watch him he tends to say unprecedented a lot). He announced the $75 billion Making Homes Affordable plan to keep four million Americans in their home and fend off foreclosure.
At his urging, his administration also announced that the Federal Reserve was going to buy $1.25 trillion worth of mortgage-backed securities and that the U.S. Treasury also would kick in an additional $220 billion to buy some more of those mortgage-backed securities.
Obama argued that purchasing more mortgage-backed securities would free up capital for mortgage lenders and subsequently would improve the housing markets.
Now that over a year has gone by, let’s fast forward and let’s see how Obama has helped the situation. Out of those four million people that Obama was going to save with his government program, he only saved 295,348 with permanent loan modifications completed by April 30, according to the most recent numbers from the U.S. Treasury. That’s about 7 percent of his original goal. In other words, he 93 percent failed on that one.
While all that was happening, foreclosures are now jumping to record highs. Bank repossessions in the U.S. rose 35 percent in the first quarter from a year earlier to a record 257,944, according to RealtyTrac Inc., an Irvine, California-based company.
So let’s take a look at housing. How has that done?
For all of 2009 there were 5,156,000 existing-home sales, which was 4.9 percent higher than the 4,913,000 transactions recorded in 2008. On a quick glance, the housing market appeared to stabilize as it posted its first annual sales gain since 2005.
However, as we have all learned, economic analysis needs more than just a quick glance. Back in 2009, President Obama placed a stay (meaning he stopped completely) on all foreclosures. This created a backlog in the foreclosure system which combined with the upcoming surge in option ARMs that are coming up for a rate adjustment could spell disaster for the real estate market.
According to RealtyTrac, nearly two million homes in America are either in foreclosure or bank-owned. Add to that Citigroup’s latest report, which says that another eight million homes could go into foreclosure, and now we start to see how big the problem could get.
While admirable to do something to help people with foreclosure, the Obama administration and government in general doesn’t understand the core problem in the housing sector or how to use the power of government to allow market principles to work.
I’ve always been a fan of keeping things simple. So when you look at the housing market there are two reasons why people aren’t paying their mortgage: a.) they don’t have the money to or, b.) they don’t see the advantage to paying their mortgage.
So let’s take a look at the first reason. People don’t have money because they don’t have jobs. The national unemployment rate is hovering above 10 percent. But that doesn’t tell the whole story.
Broad unemployment, which includes people who are looking for full-time work but can only find part-time work and those who have just plain given up on finding a job, has soared to 17.7 percent (27 million Americans) according to the U.S. Bureau of Labor Statistics.
If 27 million Americans don’t have a job, then those 27 million Americans aren’t going to be able to pay their mortgage or contribute to a mortgage where they rent.
Obama’s loan modification program essentially puts a Band-Aid on someone who has had their stomach sliced open and is bleeding to death. Any good doctor knows that you have to assess and evaluate the patient before you can treat the patient.
Instead Obama came in Band-Aids blazing. Unfortunately, we are seeing that the Band-Aids no longer are able to hold on, and the patient is near bleeding to death. All of the loan modifications won’t mean a thing unless people have jobs to pay for their mortgages.
The second problem that Obama does not understand is that people who can afford their home simply no longer wish to pay for it.
According to real estate research firm Zillow, some 10.7 million homes, or 23 percent of all U.S. homes with a mortgage, had negative equity as of April 2010.
That’s almost one of every four. In many cases homeowners are down tens of thousands of dollars, even hundreds of thousands of dollars from where they originally purchased their homes.
So think about it.
Would you keep paying a mortgage on a property that you were down hundreds of thousands of dollars on, or you would give the property back to the bank and buy back a similar property for a couple hundred thousand less?
The answer for most is absolutely the latter. That’s why people are short selling their homes and in many cases letting their houses go into foreclosure. They figure that they can rent for a while just to buy back a similar house for a price that is hundreds of thousands less than what they owed on their old mortgage.
For the homeowner this makes perfect sense.
So what is the Obama administration to do?
First, they need to come to the conclusion that government and regulation is not the answer. While there may be a measure or two to cut down on fraud (such as mandatory income verification on all mortgages which apparently is effective only as of June 1, 2010, as if they just figured that out), more paperwork and red tape will not help the problem.
The administration already has received a strong message from the state of Massachusetts that tax and spend policies will no longer work in America, and its time for America to tighten up its belt. Instead of taxing more, the Obama administration needs to tax less.
Practical measures that the Obama administration could take would be to lower the corporate tax rate. This would increase the number of businesses operating in the United States as well as reduce the cost of running a business in the U.S. If businesses have more money they will hire more workers and invest in new technologies. Both of these are good things.
The administration also cannot add new burdens such as unfunded health-care mandates to the cost of doing business. While health care is a big problem in this country, we would be amazed at what would happen to the cost of health care if we allowed people to pay for it themselves. A little thing I like to call market forces will come into play, and people will start to demand better care for lower prices (the beauty of the free market).
Yet these measures only address jobs, which make up about half of the housing problem. The administration also needs to figure out how to get homeowner mortgages more in line with housing values.
The easy answer to that is to let homeowners go into foreclosure and wait about 5-10 years until all of these bad mortgages flush themselves out. However, Americans are bit more impatient than that.
A good idea would be to give banks incentive to facilitate short sale transactions, where the seller of a home sells to a new buyer for less than the existing mortgage amount. Banks have been reluctant to approve these transactions but now they are happening with more regularity.
According to the National Association of Realtors, almost 500,000 transactions in 2009 were short sales, representing almost 10 percent of all home sales
This number needs to go up, way up. If the administration wants to give tax credits to bankers who do short sales, be my guest. We need to clean out the market of all underwater mortgages so that we can start rebuilding, both literally and metaphorically.
While the banks may take a paper hit, they were never going to collect on those mortgages and they might as well sell the homes to people who qualify for mortgages (or cash buyers) and who can make payments on time, every time.
However, the Obama administration has not made all the wrong moves.
They did make a good one when they instituted an $8,000 tax credit for first time home-buyers.
The $8,000 tax credit that the Obama administration was a positive step for housing.
But what the administration doesn’t realize is that people want to buy homes and it’s the bankers who just don’t want to sell it to them. The banks are still holding on to the idea that they will be able to collect on all of these mortgages that are hundreds of thousands of dollars more than the asset that secures them.
They are just plain wrong.
Obama and his team need to let the market flush itself out, provide tax incentives for business to operate, and stay away from onerous unfunded business mandates. Let businesses create jobs. Give incentives for banks to short sale homes bring the housing and mortgage markets back down to size. The message is fairly simple.
That’s the change that the people really want. That’s the change that the people will elect.