No matter where one’s political ideologies lie, hippies and fascists alike can agree that the housing market is in a shabby state. Prices are falling, foreclosures threaten to haunt inventory levels for up to a decade, and even though prices are low, accessibility is even lower due to economic hardship and harsh lending standards.
Unsurprisingly, the diluted half-measures that the government has taken to right the ship are ineffective and are pretty much unanimously disliked, yet for differing reasons. Some believe that the government isn’t doing nearly enough, and must act drastically in order to turn around housing. Yet on the other hand, others believe that the best way to get housing on even ground again is for the government to pull out entirely, and let the chips fall where they may. We’ll take a quick look at each of these routes and the potential fallout, and invite you to share your opinions below.
Team 1: Hands-On
So if the government decided to go all in and had the freedom/backing to do so, what could be possible? Really there are two things which have come to the table that would be of the high impact variety. One would be government support of a massive refinance program which would bring every mortgage in America down to today’s ultra-low rates, delinquent or otherwise. The other, which could happen in conjunction with the first, would be an across-the-board modification of mortgages that brings every homeowner back above water, delinquent or otherwise.
Far-reaching programs such as these, along with a few pros and cons were recently discussed in an article HERE.
The big difference with programs such as these is that they extend past troubled homeowners or those that undergo the lengthy application process. By leveling the playing field for everybody, a few things happen. First of all, foreclosures due to unwieldy mortgages or strategic default would be a thing of the past. With no more underwater homeowners, more sellers would have the freedom to move on, out and up, adding liquidity to the housing market and spurring sales activity. Untroubled homeowners who get their monthly mortgage payment slashed would then enjoy some added income every month, which could pump potentially billions back into the economy, creating jobs and thereby strengthening the buyer pool and preventing further foreclosures. Lastly, if every homeowner gets a break, then FICO wouldn’t have grounds to take a jab at all of their credit scores, as they do when people apply for loan modifications, meaning that down the line more people will be credit-worthy and able to buy homes.
On the other hand… For two programs like this to be enacted, the federal government would have to spend an unfathomable amount of money, effectively buying up a lot of America’s stake in housing. A ludicrous amount of tax dollars would go towards helping homeowners, providing relatively little direct benefit to Americans who don’t own homes, yet leaving them to pay for those that do. Americans who have been irresponsible with their purchase activity would be given a mulligan, while those that were more careful in their decision-making will go unrewarded. This type of policy, where those who made the worst decisions get the largest handout may encourage more foolish purchase activity in the future. The banks, no longer able to earn added interest on the mortgages of paying homeowners, will likely look to recuperate those losses by jacking interest rates on new mortgages, as well as on other types of credit. Additionally, if lending standards remain strict buyers will still be frozen out, meaning that sales activity may still not sustain even today’s historically-low prices, resulting in yet another value dip after all is said and done.
Team 2: Hands-Off
Okay, so what if the government did the exact opposite? Forget stepping in and slashing everybody’s debt responsibility. What’s more, what if Uncle Sam pulled the plug on the overfunded, underutilized refinance and modification programs? USDA 100% financing, GONE! FHA 3.5% down payment programs, GONE, along with the FHA itself, as well as Fannie Mae, Freddie Mac, and any other government entity that sticks its nose in the world of housing. To boot, all the bureaucratic red tape that surrounds the foreclosure process in some states where judicial approval is required…you guessed it, GONE!
To check out a video where housing experts discuss the need for a housing world without government messing about, CLICK HERE.
So in a world such as this, the banks would have the freedom to foreclose as fast and as frequently as they please. The thinking is that by “ripping off the band-aid”, the housing market will reach its true bottom as soon as possible, because only when that happens is when things will have a prayer of turning around. Proponents of such action argue that many buyers are not motivated because they see values stagnant and/or falling, which at the current rate is likely to be the case for several more years at least. If the entire shadow inventory was dumped on the market, values would reach a natural state based on actual supply and demand levels, and rebound naturally. An organic rise in values such as this would spur buyers into action, as they would be privy to value gains in housing they can believe in. As this happens, values rise faster, with the banks gaining confidence in housing and making money more accessible to even more buyers, perpetuating things ever forward, and sooner rather than later.
Naturally, there’s a few opposed to the “let-it-crash” stance on housing. In response to a certain presidential candidate who expressed this point of view, one writer listed some grievances in a recent article that can be seen HERE.
The argument goes that mass foreclosures, aside from cruelly kicking millions from their homes, would have a compounding effect that would lead to an additional wave of foreclosures not already considered. Such value crashes and housing instability would be bad for neighborhoods, communities and local governments, and the broader economy as well. With all of these people losing homes taking a big hit on their FICO score, the wimpy buyer pool won’t come anywhere near to soaking up the inventory dump for years, leaving homes everywhere to rot while the few fair-market owners still around would have no chance of ever selling, even for below bottom dollar. Rents would skyrocket, sapping income that would otherwise be spent elsewhere and falsely propping up the investment market which could create problems down the road. The banks would recuperate pennies on the dollar for their lost mortgages, further holding back the economy, creating more job loss, resulting in more foreclosures. Lastly, some say that troubled homeowners are victims of reckless lending as much as they are guilty of foolish borrowing, meaning that kicking them to the street is unfair when big banks got a helping hand.
So there you have it. While the most likely outcome will be a housing market that limps along as it has been, it is interesting to consider what a solution would look like if one camp or another were given free rein to tackle the issue. What do you think is the best path for housing to take; hands-on, hands-off, or status quo? Leave your comments below!