The conventional wisdom among conservatives is to oppose most regulations that force private businesses to do something they don’t want to do. It would say let the free market work because the market works best without government interference.
We normally agree with that logic.
But there is nothing logical about the current economic situation. The Great Recession is about to begin its fifth year. High unemployment and a stagnant housing market continue to weigh down the economy. And it is the latter that feeds the fear that is keeping any real economic recovery from happening.
So we favor the Obama Administration’s recent move to help possibly more than a million Americans — including tens of thousands here in Arizona — get refinancing even though their home values have fallen below the loan equity standards or even to the “underwater” mark. It is actually a revamping of a 2-year-old program called the Home Affordable Refinance Program (HARP).
The Wall Street Journal reports the new plan streamlines the refinancing process within HARP. It eliminates appraisals and extensive underwriting requirements for most borrowers — as long as those homeowners are current on their mortgage payments.
Huffington Post reported earlier this year that one-fourth of all homes with mortgages are underwater — meaning the selling price is below the outstanding loan balance. The Post pegged Arizona at 50 percent of its homes in that boat. In normal times, about 5 percent of all homeowners would have this issue.
This is strangling the economy.
As more homes fall to foreclosure those homes are resold at auction, which drives prices down further. As prices fall, more homes fall into the category of being worth less than the mortgage amount. This ultimately drives more homes into foreclosure. And the circle continues.
This change to HARP won’t help the millions of families that already have gone through foreclosure and now are renters. This plan won’t help those that have already fallen helplessly behind on house payments. Foreclosure is a certainty for many of them.
What this plan does is increase the chances that banks will continue to get payments in the future — because of the better interest rates and slightly lower payments for the homeowner — and decrease the chances the homeowner might have to walk away from the home and send it to foreclosure. As long as the homeowner doesn’t have to sell an underwater home and can afford the payments, then valuable time is bought for the bank and the homeowner.
The economy will not get better until Americans feel the housing crisis is easing. Businesses will not begin to take risks and increase hiring with an eye toward growing revenue until they believe no more big surprises are going to come out of the housing market and from the banking community.
The changes to HARP are a good first step. But the Obama Administration must also wrestle with a far more sticky issue — how to put many of what were on-time-paying homeowners back into homes they can afford as owners. This is important because many of the foreclosed homes have been bought up by investors at low prices who don’t live or invest in the properties. They rent them for cash flow. They hope someday to sell at a big profit.
The problem with this development is that neither renters nor the owner/investors of foreclosed homes are putting any money back into these homes. They are not doing landscaping. They are not doing home improvements. In short, a rental-based home economy doesn’t spur the economy the way homeowners would.
The impact of foreclosure is that the credit of these families is ruined for a period of years, which makes home ownership impossible.
It is time to consider another bold move. Why not force change in the period of time foreclosure is on a credit report? Make it two years instead of seven. If former homeowners are paying all of their other bills then they can become creditworthy again to be a new homeowner at a faster rate.
This is about getting the housing market stable. The U.S. economy may not recover for a very long time if that is not accomplished soon.
Fear that more bad news is ahead for homeowners is keeping business from taking risks. That fear of risk is why new job creation is not taking place even though many companies are making big profits. Fear almost always outweighs opportunity when uncertainty is real. And the housing uncertainty is very real.