Stephen Foley: Americans betrayed by half-baked attempts to fix housing market

It may be we will wish, instead of nudging the actors in the chain, government had seized control

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The Independent Online

US Outlook It is the economic tragedy that historians of the Great Recession will debate for generations to come: why was so little done to help America's homeowners out from under the burden of their crushing debt? Why was the country needlessly condemned to years of anaemic growth?

The US housing market is the Ground Zero of the global slump, and the world's largest economy remains fragile because, six years after home prices began to collapse, that market is still broken. Around $7 trillion (£4.4 trillion) of home equity has been wiped out since the peak. As of today, 11 million American homeowners owe more on their mortgage than their property is worth, while one in nine ordinary borrowers is behind on their monthly payments.

These numbers reflect the weak nature of the wider economic recovery. Few people want to risk a big house purchase when job security is low, and unemployment continues to be the main reason people fall behind on their payments. But negative equity and mortgage delinquencies also exacerbate the economic weakness. They crimp borrowers' ability to refinance and therefore limit the effectiveness of the Federal Reserve's low interest-rate policy. They trap people in homes they would rather sell, either to move in search of work, entrenching unemployment in some regions, or to start rebuilding their finances. Above all, it is just very scary to owe more than your asset is worth, something that has a gnawing effect on consumer confidence and on demand in the economy.

I have been covering this calamity in the US for six and a half years, and the contrasting vigour of the responses to unfolding crises is startling. The banks which funded reckless mortgages on overpriced property were (notoriously, but quickly and decisively, thank god) kept afloat on government loans. By contrast, successive attempts to ease the foreclosure crisis for ordinary Americans have been half-hearted, half-baked or not half as effective as hoped.

Only part of the problem is that, in Washington, no one could focus and champion the diffuse and often diverging interests of millions of homeowners from different parts of the country and different socioeconomic backgrounds in the same way that five or six white male chief executives could focus and champion the interests of their banks. There really are intractable issues here. For the same reason that subprime US mortgage debt infected the global financial system after being sliced and diced into securities traded around the world, it has been impossible to fashion a silver bullet that can fix all that ails the housing market. Every plan to modify the mortgage of a struggling borrower requires agreement from the bank that processes their payments, the investors that hold pieces of the loan, any nationalised mortgage financier (Fannie Mae or Freddie Mac) that guarantees the debt, the nationalised mortgage financier's regulator, and any bank that holds a separate home equity loan secured on the same property.

The Bush and Obama administrations each fashioned attempts to navigate this morass, with successive schemes that applied government grants or legal pressure to different actors in the chain. The largest of these, a $25bn legal settlement with banks found to have violated paperwork requirements for the mortgage foreclosure process, was sealed only this year. Even now, the regulator for Fannie and Freddie is resisting a plan that would permit them to write off some of the money that borrowers owe, resetting the debt at a lower level to make it more likely they will keep up their payments.

It may be we will look back and wish that, instead of nudging and cajoling the actors in the chain, government had seized control, perhaps with wholesale purchases of mortgage debt. Such schemes need not have been "bailouts" of indigent borrowers, or a transfer of wealth from responsible taxpayers to the fools and knaves who bought a McMansion they could never afford. Investors (or government buyers) who accepted writedowns of their debt could be allowed to share in the upside from future house price appreciation. Any losses to taxpayers could be funded by levies on banks; that would make the process a transfer of wealth merely to the reckless from the even more reckless. I suspect future economic historians will condemn us for not having found the will to act earlier and more boldly.

The US housing market looks, on several pieces of comforting evidence this week, to have found its bottom, and even to be sparking to life in parts. Toll Brothers, a luxury builder, raised its sales forecast for this year, sending its shares to a five-year high. Sales of existing homes in July were up 10 per cent on a year ago, according to the National Association of Realtors. The Federal Reserve reported last month that banks are seeing higher demand for mortgages, even under their still very tight lending conditions.

There was also another piece of good news, a Fannie-and-Freddie plan to spur "short sales", a faster, cheaper alternative to foreclosure, in which mortgage debt is forgiven for people who sell their home for less than they owe.

Good news, yes, but this is 2012, not 2010 or 2008. The tragedy is that this is all so little, so late.