The presidential candidates, in coordination with the White House, are taking aggressive steps to facilitate a smooth transfer of power to the new administration.
At the top of the agenda are national security and the economy, of course. However, considering the housing market kick-started the over-leveraged credit debacle, the administration must act swiftly to address the drifting housing market, which weighs so heavily on the economy.
First, the problem must be properly diagnosed. Rampant foreclosures, collapsing housing values, sloppy underwriting and anemic sales are the symptoms of the larger problem during the boom: too much liquidity chasing bad loans in an unaffordable housing market.
The market downturn has zapped liquidity, pushed down home prices and put a stop to poor underwriting — this correction has, in effect, already rid the market of its worst woes.
But foreclosures are the consequence, which is keeping the housing market from finding a balance, as more and more homes are dumped on the market, further pushing down values. And the credit crunch has pushed underwriting standards to the other extreme, limiting the number of qualified borrowers who can purchase the rising number of home listings.
Stemming the number of foreclosures will go a long way to stabilizing the market, which should be the administration’s first step. Clearly, the new president’s first job is swift action on the human misery side of this mess.
With that challenge at the top, here is our to-do list for the next occupant of the Oval Office.
Institutionalize loan modification activity
FDIC head Sheila Bair has been experimenting with controversial programs that facilitate loan modifications, but the program is not scaling fast enough to keep pace with foreclosures. The private market is confronting the upside-down mortgage problem with lenders quietly accepting modification terms brought to them by brokers and lawyers.
This submarket should be encouraged but also regulated to insure that fees are not excessive, that the public purpose is achieved and that it is not a way to deceive people into modifying their loans into worse loans. The new administration must also find a balance that is fair — helping the most needy borrowers — as well as not ignoring the need for expanding the supply of mortgage credit.
Rebuild faith in the secondary mortgage market
Liquidity is at dangerously low levels as Fannie Mae and Freddie Mac recover. But confidence in these institutions must be restored, so liquidity is stable. With proper oversight and vanilla loan products, the secondary market will find a new level of risk and reward as investors return cautiously and slowly. Regulation (below) will play an important hand returning trust to the mortgage market.
Expand the scope of FHA
The Federal Housing Administration has always played a powerful hand in the U.S. housing market in times of market failures. Its share of home loans has jumped from 4 percent to more than 15 percent in the last year. However, FHA has had its share of scandals over the decades and should not be unleashed unattended.
Bring dignity to renting
Homeownership is the American Dream. We have learned, however, it is not for everyone. An unevenness was given to owning over renting in the last two decades, as Republicans and Democrats ignored the needs of the nation’s rental market. The government rewards homeownership with more than $100 billion in tax subsidies on interest and property tax deductions. A new priority should be placed on renting a decent home at reasonable rents.
Re-tool federal housing programs
The federal government expenditures for affordable housing exceeds $40 billion. These programs should be re-thought in the current economic environment to give maximum help to those in need: low-income renters and people facing foreclosure.
An entirely new regulatory system must be put in place to bring oversight to the real estate market. One of those steps must be regulating real estate agents more like stockbrokers, where their fiduciary obligations are clear and the penalties are severe. Good agents will pass the test, bad ones will not and the market will be more transparent with fewer but more qualified agents.
Beef up RESPA
A core regulatory framework is in place to bring more transparency to the backend of the real estate transaction, preventing dubious relationships and excessive fees that are buried in the paperwork. RESPA should be bulked up, including more resources to enforce and punish those who do not comply.
The administration must find new and capable leadership who are more than cheerleaders for the market but also leaders in crafting good long-term housing policy and fettering out shenanigans and corruption. Industry players who have conflicts of interest have filled too many housing positions across the country, including state real estate regulators.
Restore fundamental values for achieving homeownership
The government must stand on the side of savings — not consumption — when it comes to housing. That means building and designing housing that is to the scale of people’s needs as well as encouraging sensible down payments, even-handed mortgages and usury rates on second and third mortgage loans to prevent predatory lending.
Resist quick housing stimulus packages
In haste, governments often do things that have unintended consequences. This market correction must be allowed within limits to correct, which means bad lenders, irresponsible borrowers and poorly managed companies will go under. In addition, the market needed downward adjustment on housing prices and should not be followed by government actions to immediately stimulate housing inflation. This markets needs stability, not any more wild gyrations.
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