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Issue brief: Housing

The Electoral Issue:

The housing market, which collapsed in 2007 and helped throw the economy into a recession, has still not recovered. House values remain low, trapping owners in mortgages that exceed the value of their homes. The glut of foreclosed homes continues to clog the market, keeping prices low.

The Challenge:

To increase home prices by nursing the market back to health, foreclosing where necessary and keeping people in their homes where prudent, and to prevent another real-estate bubble from forming.

Problems:

Too many easy mortgages

The housing market crashed largely because too many people bought homes they could not afford. Poor personal financial management played an obvious role, but the proliferation of shady financial products that encouraged people to sign up for mortgages they couldn't afford was also a huge contributor to the crash.

As the market crashed, those homeowners that could afford to get out from their mortgage often sold at a loss. Many remain stuck paying mortgages that now exceed the value of their home (called "underwater mortgages"), and more still have been pushed into foreclosure. In the wake of the housing market's collapse, it is not clear that these risky financial practices have ceased, raising the prospect of another bubble in the future.

Foreclosures

Between 2007 and early 2012, roughly 4 million families were pushed into foreclosure, starting a vicious cycle: as foreclosures accelerated, prices were depressed further, which led to more foreclosures. Banks that loaned money to subprime borrowers were forced to absorb billions of dollars in losses as more and more homeowners - many of whom lost jobs or income due to the recession - were pushed into delinquency.

Hard Times Generation: Families living in cars

The glut of foreclosed homes affected some housing markets disproportionately, particularly areas of California, Nevada, Florida, and other states that were grossly overbuilt and overvalued during the height of the real estate bubble.

After a brief drop in foreclosure filings in 2011 due to lenders' concerns about legal liability, banks and other mortgage agencies resumed the foreclosure process at a fast clip - in August 2012, according to foreclosed-property marketer RealtyTrac, 193,508 homes were served a foreclosure notice, an increase of 1 percent from July. Perversely, the health of the real estate market may actually be inversely correlated with the rate of foreclosure filings - only after the bad loans have been cleared out of the market can housing prices climb.

Housing Prices

The housing market peaked around March 2006, and began steadily falling throughout 2007. In 2008, the bottom fell out, and housing prices plunged nationwide. In March 2012, the median home price in America stood at $234,500, and the average stood at $291,200, the lowest level in nearly a decade.

Because most families' home ownership is their biggest source of equity, the drop in housing prices has resulted in a staggering drop in median household net worth: according to the Federal Reserve, the median household net worth in 2010 was $77,300, down from $126,400 in 2007. The crash in housing prices directly caused a full three quarters of this loss, with declines in real income accounting for much of the remainder.

There are signs that housing prices may be slowly climbing up from recent lows. According to the latest data from the Case Shiller housing price index, home prices in July 2012 gained 1.6 percent compared to a year ago. All 20 regional markets monitored by the index have posted gains for the last three months, and 16 of 20 showed improvement over the previous year. Still, as of March 2012, almost a quarter of U.S. homeowners - approximately 11 million - were underwater on their mortgage. There may be tentative signs of health in the housing market but it has a long way to go before the market is healthy again.

Fannie Mae and Freddie Mac

Many conservatives identify the prime culprits behind the housing crisis as Fannie Mae and Freddie Mac, two "government-sponsored enterprises" (GSEs) that help extend home ownership to low-income households. Fannie and Freddie purchase mortgages from private lenders, providing these loans with the government's backing.

As part of their mission, Fannie and Freddie are required to purchase a number of loans to low- and middle-income borrowers. Critics argue that these sorts of federal affordable housing policies put people in homes they could not afford. When these subprime borrowers became delinquent in their payments, the market went belly-up.

However, some caution against blaming Freddie and Fannie for the crisis, arguing that most of the subprime mortgage market was driven by private lenders, not the GSEs (Federal Reserve data from 2006 indicated that 83 percent of subprime loans in that year were issued by private lenders.) While GSEs may have pioneered the subprime mortgage craze, private lenders were more than happy to get in on the action and eventually far outpaced Fannie and Freddie in their subprime lending.

As the Atlantic's Jordan Weissman puts it, "If GSEs helped pave the road toward the cliff, it was private sector loans and securitization that nearly took drove us over the edge. Blame banks for taking us to the brink, blame Fannie and Freddie for blazing the trail, and blame Congress for failing to put the brakes on the whole enterprise."

Next page: Proposals

Proposals:

Refinancing and Debt Relief

The Obama Administration's attempts to resuscitate the housing market have generally relied on lenders whom the government has pressured to refinance mortgages and write off a portion of beleaguered homeowners' debt. While the government set aside funds to buy mortgage loans, the administration has largely rejected a direct federal bailout of mortgage debt in favor of a plan that encourages lenders to restructure mortgage debt.

The results have been mixed: 4.3 million homeowners with FHA-sponsored loans have applied for mortgage relief, but the most recent data from the Treasury department indicates that, as of May 2012, just over 1 million homeowners have received government-sponsored loan modifications.

Challenges: The repeated piecemeal attempts by the administration to facilitate a recovery in the housing market have fallen far short of anticipated goals. As the New York Times reported, "The administration did not push for legislation to make mortgage companies help borrowers. The financial incentives it offered were often insufficient. And it responded slowly to warnings, including those in letters homeowners sent to Mr. Obama, that companies were not cooperating. The result was a plan that failed to meet even its own modest goals, data shows."

The indirect approach - asking mortgage companies to restructure loans instead of having the government directly step in and purchase those loans - has left many wondering whether the economic recovery could have been better if the Obama administration had pursued a federal bailout of homeowners. President Obama must be pressed on the inadequacy of his current housing policy - if more refinancing and relief do not gradually nurse the market back to health, what is the next step?

Romney's Plan

Mitt Romney's housing plan consists of four main pillars. First, he proposes a sell-off of the roughly 200,000 government-owned vacant homes, a step that could increase the value of homes adjacent to vacant properties by reviving the neighborhood. Second, he wants to "facilitate foreclosure alternatives" for those who cannot afford their mortgage. Third, he proposes a regulatory overhaul, replacing "complex rules" with "smart regulation" to help the market recover and jump-start lending to worthy borrowers. Finally, he would reform Fannie Mae and Freddie Mac to protect taxpayers from additional risk by replacing public funding with private money in the secondary mortgage market.

Challenges: Romney's plan is either too vague or more of the same. Mark Zandi, an economist with Moody's Analytics, explained, "The Administration could reasonably say that it is pursuing each of these policy prescriptions and then some."

President Obama is also promoting foreclosure alternatives. Romney proposes a sell-off of government-owned properties, but Fannie and Freddie have already begun selling these homes in February 2012. In these areas, it is not clear what Mitt Romney would do differently from the President.

Other elements of the plan are too vague. He talks about unwinding Fannie Mae and Freddie Mac but provides no specifics about how the private marketplace can step in. His proposal to repeal Dodd-Frank and replace it with "smart regulation" is similarly vague, eschewing any details about what the new regulatory regime would look like. Romney must be pressed for details - how is his plan different from the President's? What specifically will he do to reform regulations and GSEs to create a healthier housing market?

Sub-prime Mortgage Settlement

In 2012, five of the nation's biggest mortgage lending organizations agreed to pay a settlement totaling $26 billion dollars that could provide relief to almost 2 million struggling homeowners who could either refinance their mortgage at a lower rate or have some of their mortgage debt reduced. An additional 750,000 people who lost their homes to foreclosure during the nadir of the collapse could receive payments up to about $2,000.

Challenges: The agreement, while substantial, does not come close to addressing the full depth of the subprime mortgage crisis. Government efforts to ameliorate the mortgage crisis have fallen short of their anticipated goals. The $26 billion set aside could help far fewer borrowers than intended.

Consumer Financial Protection Bureau

The Dodd-Frank financial regulatory reform bill signed in 2010 by President Obama established the Consumer Financial Protection Bureau (CFPB), a federal agency tasked with, among other things, safeguarding consumers against the kinds of mortgage products that helped crash the real estate market in 2007 by luring consumers into mortgages they could not afford. The agency will not jolt the moribund housing market, but it could prevent a similar housing bubble from forming in the future by guarding consumers against predatory lending and their own recklessness.

Challenges: The CFPB is relatively controversial, assailed by Republicans as another bit of bureaucratic red tape that will stifle growth and constrict the credit market. And the extent of the CFPB's power is dependent on the specifics of Dodd-Frank's implementation. The fine print could still render the agency relatively toothless.

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