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Fed’s White Paper on Housing: Uncle Sam a Landlord? Obama’s Plans for Re-Election?

Posted by Larry Doyle on January 5, 2012 9:58 PM |

Housing and labor remain the cornerstones of our economy. In fact, the health of our labor market follows that of housing just like night follows day.

The near term prospects for both housing and labor remain decidedly challenging. The success of assorted federal programs to support housing so far have obviously been underwhelming.

That said, there are rumblings emanating from Washington that the Obama administration may end run Congress while unilaterally launching a massive program to support housing via Freddie/Fannie orchestrated refinancings.

Will this program be the ‘rabbit’ which Obama and team pull to prop the economy and their re-election chances in 2012? 

Do you think the SEC’s recent case brought against former Freddie and Fannie execs might be nothing more than a sideshow to distract the public from the multiple hundred billion dollar costs involved in this refinancing program which will be absorbed by Freddie/Fannie, or should I say the American taxpayers?

In addition to a massive loan modification/refinancing program, might we also see Uncle Sam and our major money center banks become our nation’s largest landlords by a program to rent current REO (real estate owned) properties rather than trying to sell them?

Thank you to a regular reader of Sense on Cents who shared with us a 28-page Federal Reserve white paper on these topics and related housing and mortgage finance issues. This paper concludes:

The challenges faced by the U.S. housing market today reflect, in part, major changes taking place in housing finance; a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally).

The significant tightening in household access to mortgage credit likely reflects not only a correction of the unsound underwriting practices that emerged over the past decade, but also a more substantial shift in lenders’ and the GSEs’ willingness to bear risk.

Indeed, if the currently prevailing standards had been in place during the past few decades, a larger portion of the nation’s housing stock probably would have been designed and built for rental, rather than owner occupancy. Thus, the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance.

Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions–for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties–or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.

Absent any policies to help bridge this gap, the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

In addition, reducing the deadweight losses from foreclosures, which compound the losses that households and creditors already bear and result in further downward pressure on house prices,would provide further support to the housing market as well as provide assistance to struggling homeowners.

Policymakers might consider minimizing unnecessary foreclosures through the use of a broad menu of types of loan modifications, thereby allowing a better tailoring of modifications to the needs of individual borrowers; and servicers should have appropriate incentives to pursue alternatives to foreclosure.

Policymakers also may want to consider supporting policies that facilitate deeds-in-lieu of foreclosure or short sales in order to reduce the costs associated with foreclosures and minimize the negative effects on communities.

Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.

As this paper suggests, however, there is unfortunately no single solution for the problems the housing market faces. Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.

For those who are interested in reading the entire document, I am happy to link to the Federal Reserve’s “The U.S. Housing Market: Current Conditions and Policy Considerations.” Please click on the image below to access the PDF document.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.


  • fred


    One has to wonder why refi is not occurring thru normal channels or why banks have tightened lending standards beyond conservative norms. Is it repayment risk as most would have you believe, or is it interest rate risk and the capital loss that will results when the Fed, at some point in the future, allows rates to normalize higher? ZIRP most certainly wont last for the next 20-30 years.

    The housing market will only commence a LT sustainable recovery when housing prices are allowed to fall to affordable levels (given normalized interest rates) and the inventory overhang due to mortgage default is cleared from available supply as either performing rental property or thru sale.

    As you said, any attempt to artificially ‘jump start’ the housing recovery will be an expense ultimately born by the taxpayer. Why would a reasonable creditor knowingly assume such a probable risk!

    Is the short term goal of an Obama re-election worth the long term expense? Isn’t this the type of political micromanaging and market manipulation that got us into this mess to begin with?

  • LD: Recommended

    A friend shared the following with me…

    RUSH: This is interesting. This cleared about 7:30 last night. “White House Said to Have No New Plan for Mortgage Refinancings.” It’s a Bloomberg story: “The White House has no plans for a new mass mortgage refinancing program, an administration official with knowledge of the matter said.

    Bank of America Corp. led a surge in shares of U.S. lenders today on speculation that the [regime] might provide more aid to distressed homeowners.” Now, this was a real story, and it was a real story from James Pethokoukis, and it was sourced with administration people — and it was highly detailed. We had it yesterday. I spent a lot of time detailing it on this program, what it was going to be.

    Now, all of a sudden at the end of the day yesterday, the regime puts out this announcement: No, no, no, no, we’re not doing any of that! (I wonder why.) I wonder why the regime did that.

    Do you understand the fur that must have been flying? Do you understand the phone calls that must have been flying all over this country when people find out about this mortgage refinancing? HARP 2 it was going to be. It’s a real thing.

    And now the regime said: No, no, no, no, no plan to refinance mortgages. Unstated in the story is: “Limbaugh doesn’t know what he’s talking about.” But don’t believe ’em. It’s an idea. It’s a serious idea. They’ve got it. There are detailed plans.

    Jim Pethokoukis found ’em and reported. People are looking at it, thinking about it. In one fell swoop, it would be buying an election. It’d be a $1.2 trillion stimulus plan, cut $400 to $500 a month off of everybody’s mortgage payment, and all you have to do to qualify is be three months current?

    Now all of the regime says: No, no, no, no, no such plan. No such plan! (I wonder what happened, what went wrong.) (interruption) Well, we beat it back for a while. The big mistake was that somebody leaked it.

    This is the kind of thing that they’re gonna do under cover of darkness now. They haven’t given this up. They’re gonna do this. There’s a lot of time left to buy votes in this election.

  • fred

    We have a real interesting economic scenario unfolding into Q112. Dr. John Husmann’s column this weak is a must read. To summarize, it looks like we may be entering a recession (in short order) with a neg print in jobs, when it happens, providing proof positive. The recent uptick in economic activity notwithstanding.

    At the same time we are in the last year of the presidential cycle which is usually a period of expanding economic growth.

    What gives, what might Washington have up it’s sleeve? As I understand it, the consumer ran up the credit card and dipped into savings pretty hard over the holidays, he/she will probably need some sort of a gov’t spending program to keep this thing going.

    LD, you liked my last prompt, (hope I dont go to the well too often), maybe it’s time to check in with the Consumer Metrics Institute for some timely incites.

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