The Ancillary Costs of the Housing Bubble
I’ve written about a lot of the following details before, but I think it’s important to understand all the consequences that sprung from the inflation of the housing bubble. It has damaged this country in a multitude of ways.
Many of the people I’ve been corresponding with for my HAMP series were actually current on their mortgages when they entered the program. Their issue was negative equity, what is commonly referred to as being “underwater” on their mortgage. Simply put, they owe more money than the house is worth. And that doesn’t just have a psychological effect, but a very real financial effect even for people with job security and affordable payments:
When Mike Choi, an engineer living in the New London, Conn., area, bought a three-level townhouse in 2004 for $183,000, he wasn’t worried about the real estate market.
He was 24, had a good engineering job, and could easily afford monthly payments on the mortgage he took out with no down payment. But six years later, his home’s value has fallen to the low $150,000s. Choi, now 29 and with an MBA, feels restricted in his job hunting because moving elsewhere would force him to sell his home for less than he owes on it.
So he is doing what millions of Americans are doing these days: He’s getting used to living life “underwater” — the real estate industry’s term for a property worth less than the outstanding mortgage on it.
A broad swath of homeowners who have been able to avoid the worst-case scenario of foreclosure are nonetheless grappling with the impacts of lost home equity. Living underwater presents a new set of challenges, like not being able to tap home equity to fund a child’s college tuition or having to wonder whether the cost of home improvements like a remodeled kitchen can ever be recouped.
Choi made only one mistake – he reached working age at the wrong time. And as a result, he feels locked into his housing situation and unable to make the most of his earning potential. He also loses almost all of his security in the event of a catastrophic personal financial crisis, like a medical problem. Those kinds of issues crop up frequently in the profile of someone who eventually loses their home to foreclosure. And because of his high loan-to-value ratio, he can’t refinance his high interest rates down.
Another very little-known ramification from the housing crisis and the high vacancy rate – people who want to employ their Constitutional right to vote may run into problems.
With midterm elections nearing, advocacy groups and election officials around the country are concerned that homeowners and renters affected by foreclosure will face complications at the polls, if not ignore the election altogether. They fear the problem may be more prevalent than in 2008 because the number of property foreclosures this year is expected to be more than three million — 30 percent greater than two years ago, according to RealtyTrac, an online foreclosure database.
By law, voters must register in the county in which they reside, meaning eligibility is tied to home address. Foreclosure proceedings, however, can make figuring out which address to use confusing. Some people continue to live in foreclosed homes. Some move out, but maintain a right of redemption on the property. Still others live in temporary housing or move from place to place.
These people are just trying to make it through their personal housing struggle and aren’t that concerned with voting, but nevertheless, depressed civic engagement is a problem. One Congressional candidate in a hard-hit area for foreclosures told me that he can’t figure out how to walk a precinct on a street which only has one occupied home. And with the confusing mix of state eligibility rules, disenfranchisement is almost guaranteed.
Predictably, the profile of someone going through these foreclosure issues or high mobility skews more to the Democratic side. So Republicans stand to benefit at the margins from the housing bubble in 2010.
Mind you, these are the LEAST important consequences from the popped bubble – foreclosure, ruined credit, bankruptcy, all of them are much harsher.
The point is that a loss of wealth in the trillions from a run-up and then crash in home prices has implications for virtually everything in American life. And so that demands a real answer to clear the market, and give people some relief from this myriad of complications. That means “breaking the refinance strike,” as Christopher Whalen puts it.
“In every Fed easing event during my career in finance (1986, 1992, 1998, 2002), it was the wave of refinancing of debt after the Fed eased interest rates that put permanent disposable income into the hands of households,” notes a former Fed official who worked in the banking industry for decades. “In this last easing, however, FNM, FRE and the TBTF banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.”
Rules changes made by FNM and FRE since the Treasury’s conservatorship began in 2008 have prevented millions of American consumers and business from refinancing their mortgage debts. The Bernanke Fed will attempt to compensate for this de facto freeze on refinancing with QE II, but this will fail.
So what should President Obama do?
First, the Obama Administration should use the power provided in the Dodd-Frank legislation to force an accelerated cleanup of bad assets and to mandate refinancing and principal reductions for performing loans with viable borrowers. If any banks resist, the Treasury should use the power under current federal law to remove recalcitrant officers and directors of these same banks.
Whalen also calls for massive anti-trust investigations with the top mortgage originators, and to use Fannie and Freddie to refinance all existing residential mortgages in their portfolio. It’s time to think big and break up all these terrible consequences.