Today’s Courier Herald Column:
My phone call Friday night was sadly too familiar. A good friend was seeking advice on refinancing his mortgage. His bank had determined that as a self employed individual, he didn’t demonstrate sufficient income to prove he could make his mortgage payments at a reduced interest rate below four percent. This, despite his track record of almost 100 consecutive on time payments with an interest rate closer to seven percent.
To say the least, he was a bit frustrated, but he is not alone. One of the many other examples is a friend who bought a high rise condominium in Atlanta just before the market crashed. He’s paying an interest only mortgage at just under 7%, but the value of his property is now worth less than one third of what he paid for it.
He frankly would be much better off if he walked away from his mortgage and had a “strategic default”. Yet, he feels morally obligated to pay his loan, but would like to refinance. His loan to value exceeding 300% has thus far precluded this, though yet another recently approved federal program may provide some help.
My background in banking, construction, and politics has put me in the middle of many such discussions. They usually end up with me trying to oversimplify a banking, credit, and housing market that has transcended dysfunction into the complete absurd. And there’s always a discussion of the bailouts.
We’re all well aware that the Federal Government passed TARP in 2008 to provide emergency liquidity to a financial market that was on the verge of collapse. I maintain the politically unpopular stance that this, and the literal trillions of emergency loans the Federal Reserve extended member financial institutions in short term lending during the period averted a total collapse of the western financial and economic systems. I also contend that TARP was implemented about as badly as this kind of policy could have been, and the methods that Treasury Secretary Paulson used to sell the measure to a skeptical Congress bordered on fraudulent. This debate, unfortunately, is now left to the historians.
The current debate, however, is how do we finally move forward from this financial and housing mess, three years into the “solution”. Many of my Republican and Libertarian leaning friends – and many of the current Presidential candidates – advocate a “let the market sort it out” approach, claiming the government can only do more harm. While that sounds ideologically consistent, it fails to appreciate the reality of the situation.
The current “market” is a total and complete function of government action and inaction. FHA, which is virtually the only way a purchaser can buy a home with less than 20% down, was responsible for 37% of all mortgages in 2009. Fannie Mae, which may end up needing a trillion of taxpayer funds to remain solvent, continues to underwrite just under half the country’s mortgage volume. The Federal Reserve owns over one trillion in the direct obligations outstanding from bonds backed by outstanding mortgages.
The government is highly involved in the sale side as well. With over half of the homes in Metro Atlanta and roughly one quarter nationwide worth less than owners’ owe on their mortgage, banks must sign off on the sales if there is a deficient balance. Yet the ever changing regulations in the post 2008 banking environment have everyone questioning what the rules are, with “short sale” seeming to be a four letter word for many in the real estate business. I can personally attest to having a rule change occur in mid-sale, with one large bank holding the mortgage on a home I was trying to buy signing a consent decree with the Department of Justice during my attempted purchase. The agreement forced the bank to re-review any customer file for anyone facing foreclosure or asking for a short sale. This started the process over, and subsequent rule and valuation changes scuttled the transaction.
The inability to complete short sales pushes many homes into foreclosure, with one third of the local housing market now composed of foreclosure sales. This continues to push home prices down, which puts even more homeowners underwater, perpetuating this cycle.
The University of Georgia now projects it will be 2020 before Georgia’s economy returns to pre-2008 employment levels, based largely on the lack of recovery in the housing market. With many homeowners trapped in homes they can’t sell but owe more than they are worth, it’s hard to argue with the assessment. It’s also difficult to watch the number of ways Government is involved in this market and accept that nothing can be done from a policy or regulatory standpoint to improve the situation.
Georgia is not likely to get a large focus during this presidential election. When it does, however, candidates and the current President must be forced to discuss what should or should not be done from their viewpoint to address the current state of the housing and mortgage markets. There are quite a few homeowners who have played by the rules, paid their mortgages, and are left as the only players not bailed out. They deserve better answers than I’ve been able to give them in my now too often conversations.