State of the Union Preview: Housing and Fairness Don’t Connect

If the theme of tonight’s State of the Unionaddress is fairness, then President Obama would be wise to steer clear of housing; most of the proposals to fix the nation’s still struggling real estate market are intrinsically unfair to a large majority of Americans.

From a mass refinance plan to mass mortgage principal forgiveness, the supposed “fixes” will reward some at the expense of far more.

Let’s start with that principal forgiveness. Some Democrats have been hounding the regulator of Fannie Mae and Freddie Mac (the FHFA and its leader Ed DeMarco) to initiate a program to reduce the value of mortgages where the mortgage is larger than the value of the home, i.e. “underwater”. The idea is that this will keep those borrowers from defaulting on these mortgages.

DeMarco is against this, so Democrats, or at least Rep. Elijah Cummings, the ranking Democrat on the House Oversight Committee, went so far as to request proof of Demarco’s contention that such a program would do more harm than good. This after the Federal Reserve officials, in a recent “White Paper,” suggested, “some actions that cause greater losses to be sustained by the [GSE’s] in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

The losses to Fannie and Freddie, according to DeMarco, would be somewhere around $100 billion, if they were to write down principal on all 3 million underwater mortgages backed by the two. That money, DeMarco noted in a letter back to the Congressman, would come from taxpayers, who have already footed a $150 billion bill from Fannie and Freddie.

Then there’s that pesky refi plan that’s been floating around for a few years now. The idea is that Fannie and Freddie would refinance about 14 million of their own borrowers to 4 percent or less, as long as the borrowers are current on their loans. This would supposedly juice the economy with household savings of about $36 billion a year. Administration officials have already told me they are not considering such a program as it is too expensive in too many ways. And then there’s that fairness issue again, as in why should the government fund refinances for borrowers with Fannie and Freddie loans but not for the other half of American borrowers who don’t have Fannie and Freddie loans?

We can, however, look for the president to say something about the current expansion of the government’s refinance program for underwater borrowers, and we’re eager to hear how he thinks it’s going, given that it has fallen under harsh criticism for helping too few borrowers. Perhaps he might want to change/expand that program, but then again details are not exactly popular in State of the Union addresses historically.

President Obama will likely mention the settlement talks going on between states attorneys general and the big banks over the so-called “robo-signing” foreclosure paperwork scandal, which involves administration officials as well. In fact HUD Secretary Shaun Donovan and U.S. Associate Attorney General Thomas Perrelli were in Chicago yesterday meeting with state AGs. They made it clear there is no deal, and talks have been ongoing for a year now, but yesterday’s meeting kind of sets up the opportunity for the president to mention its progress.

From what we know of that deal, it could involve principal write down for some borrowers in trouble on their mortgages. That would be the banks’ punishment, but of course you have to ask if that’s entirely fair to everyone else who did pay their mortgages on time and in full and would like to see some forgiveness for their financial pain as well.

The one potential housing fix that does seem fair is the REO to rental program being hashed out among federal regulators and the FHFA. This would be for Fannie, Freddie and the FHA to sell their REO’s (foreclosed properties they now own) in bulk to investors. There would likely be some tax incentives offered, but this is the fastest way to get rid of distress in the housing market, thereby stabilizing overall home prices. It would also put more rental inventory on the market, as demand has been high, pushing up rents higher. The trouble is this isn’t particularly politically popular, as it runs contrary to the American Dream of home ownership, not to mention it helps investors, who are largely blamed for the housing mess in the first place. And there’s that pesky fairness thing again.

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