Republican Candidates Give Housing a Short Sale
Shame on the Republican candidates for president. Shame on them for showing up at debate specifically targeting the U.S. economy with not one credible, rational, even reputable notion of what to do about the nation's housing mess. It baffles the mind that this sector of the economy, responsible for about 18 percent of the nation's gross domestic product, is in freefall, and yet eight potential new leaders of this nation not only don't understand the problem but don't have a clue what to do about it.
My favorite, and I write this with as much sarcasm as a computer keyboard will afford, is the argument that the Dodd-Frank financial reform bill is to blame for housing's current despair. Foreclosures, falling home prices, negative equity, nil consumer confidence, record low home building...yep, gotta be Dodd-Frank.
"If the Republican House next week would repeal Dodd-Frank and allow us to put pressure on the Senate to repeal Dodd-Frank, you would see the housing market start to improve overnight," Speaker Newt Gingrich told the crowd in Michigan last night. His reasoning is that, "It kills small banks, it kills small business."
Increased regulation has certainly made the life of a banker today tougher, but the fact that there was zero regulation ten years ago allowed and encouraged reckless behavior on Wall Street. It created the supremely negligent subprime mortgage trading bonanza that brought down big banks, little banks and homeowners alike...and threatened to take down the entire U.S. economy. Were we to do nothing to change that?
And Mr. Gingrich, if I may, how would repealing Dodd-Frank suddenly help the 4 million borrowers behind on their mortgages today and the 2.2 million in the foreclosure process today keep their homes? How would it put a bottom on home prices? Do you honestly believe that it would suddenly open the mortgage markets wide, allow banks to somehow fix all the troubled loans on their books and fuel a gigantic lending spree that would ignite home buying and selling again like the good old days? Is that even what we want??
Let me just finish with Mr. Gingrich's last note, "The banks are actually profiting more by foreclosing than encouraging short sales." That's just flat out wrong. To begin with what bank has ever profited from a foreclosure OR a short sale?
Industry sources tell me that a short sale nets the bank on average 20 percent more than a foreclosure. Short sales speed up the time frame for disposal of the property as well, as foreclosures can take years to process. During that time, foreclosed borrowers can destroy the property, flushing cement down the toilet and stealing everything in the home that is and isn't nailed down. In a short sale, the homeowner lives in the home until the deal is done, and because they are not getting a huge hit to their credit and being kicked out by a sheriff's deputy, they generally don't destroy the house. In a short sale, the bank knows exactly what it's getting, unlike in a foreclosure when the bank has to take back the house in some unknown condition, market it and re-sell it at an unknown distressed price. 'Nuff said.
My second favorite argument is that it's all Fannie and Freddie's fault, and if we take them down, housing comes back in a flash.
"For these geniuses to give 10 of their top executives bonuses at $12 million and then have the guts to come to the American people and say, 'Give us another $13 billion to bail us out just for the quarter,' that's lunacy," Rep. Michelle Bachmann argued on CNBC last night. "We need to put them back into bankruptcy and get them out of business. They're destroying the housing market."
No question, Fannie Mae and Freddie Mac are bleeding money, costing the taxpayers billions already and potentially billions more in the near future. Something needs to be done to change that, but "bankrupting" Fannie and Freddie would take down the U.S. economy as we know it, and it boggles the mind that a person running for president wouldn't understand that. She in fact noted that Fannie and Freddie support the bulk of the mortgage market. That's true. Without them there would be no lending. Does she think the private market would just come running back in and give the nation's beleaguered borrowers 3.99 percent 30-year fixeds across the board?
Only Herman Cain seemed to get that. He argued that we need to fix unemployment first with his various proposals. "Okay. After I did those three things that I outlined, then deal with Fannie Mae and Freddie Mac. You don't start solving a problem right in the middle of it. So we've got to do that first," he reasoned.
Fixing unemployment was the only housing plan the candidates could offer. When CNBC's Maria Bartiromo asked Governor Mitt Romney, "Not one of your 59 points in your economic plan mentions or addresses housing. Can you tell us why?" He responded, "Yes, because it's not a housing plan. It's a jobs plan." I don't love that answer, but at least I can respect it.
"Our friends in Washington today, they say, 'Oh, if we've got a problem in housing, let's let government play a bigger role.' That's the wrong way to go. Let markets work. Help people get back to work. Let them buy homes. You'll see home prices come back up if we allow this market to work," argued Romney.
There are plenty of analysts who agree that the market needs to work itself out, as painful as that may be to average Americans, many of whom are in line to lose their homes. Until the foreclosure mess runs its course, and all those homes are filled with borrowers who can afford them, home prices will not recover, plain and simple, goes the argument.
I'm not saying here that the Obama Administration has done anything particular stellar to stimulate a housing recovery. A small refinance program for underwater borrowers isn't the cure-all, and forcing banks to write down mortgage principal is not politically nor technically feasible. But without some plan, this crisis could go on for a decade, like it did in Japan, as President Clinton noted recently in an interview on MSNBC's Morning Joe.
I'm not saying I have the answer, the great plan to fix our nation's housing crisis. But I'm not running for president.