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Federal National Mortgage Association
Federal Home Loan Mortgage Corp
For an economy that’s growing at an anemic rate of 1.5 percent, you’d think there would be more discussion of the U.S. housing market on the campaign trail. The sector has powered past recoveries and is responsible for as much as one-fifth of gross domestic product.
Yet President Barack Obama has made little more than a passing reference to housing in his campaign, calling it a drag on the economy and recommending an expanded mortgage-refinancing program. Presumptive Republican nominee Mitt Romney has said the government should avoid intervening and allow the housing market to “run its course,” wherever that may lead.
This verges on political malpractice. Voters deserve a substantive conversation about whether housing can be revived, to what extent mortgage credit should be restored, and what, if anything, the government can do to achieve these goals.
The Obama administration’s efforts to help struggling homeowners through various loan modification programs could charitably be termed timid, incremental, and largely ineffectual. One in five mortgage borrowers owe more than their homes are worth, the same level as when Obama came into office. Many still pay high interest rates because they can’t refinance. Three taxpayer-subsidized mortgage juggernauts—Fannie Mae (FNMA), Freddie Mac (FMCC), and the Federal Housing Administration—account for more than 90 percent of the financing that does occur, helping keep private capital on the sidelines.
Romney says the best thing for the housing market is a growing economy, and he seems to eschew any type of government assistance for troubled borrowers. This is a chicken-and-egg issue. The economy isn’t going to achieve the lift it needs absent a real recovery in housing. The question is how to restart the housing market without resorting to the shoddy practices that fueled the last crisis and creating another housing bubble.
One responsible place to start is by forgiving portions of mortgage principal for borrowers who owe more than their homes are worth. By lopping as much as 50 percent off borrowers’ loan balances, Fannie, Freddie, and other lenders can restore the equity that gives people an incentive to maintain their homes and stem the losses associated with drawn-out foreclosure proceedings. To ensure debt forgiveness doesn’t simply reward irresponsible behavior and encourage defaults, borrowers should have to give up at least 25 percent of any future appreciation in their home’s value, allowing lenders to share in a piece of the upside.
Obama should do more than simply encourage debt forgiveness at Fannie and Freddie. He should demand that Edward DeMarco, acting director of the Federal Housing Finance Agency, allow such a move. Romney, too, should come out in support of writedowns—after all, debt relief really amounts to letting the market do what’s in its best interests.
The U.S. won’t unlock its economy until it unlocks housing, and that’s not going to happen if the candidates aren’t outlining solid steps they plan to take should they get the keys to the Oval Office.
To read Virginia Postrel on “you didn't build that” and Simon Johnson on Mario Draghi, go to: Bloomberg.com/view.