President Barack Obama, in his opinion column for the Register, is asking Congress to pass his proposed housing plan, which he claims will help stabilize the housing market.
It’s makes great sense that President Obama is now making housing a focal point of his presidency given it will be a major issue during the president’s 2012 reelection campaign, especially in key states such as Nevada and Florida where the effects of the housing bubble burst hit hardest. And the placement of his op-ed in Orange County fits well since real estate is one of the county’s economic drivers. Plus, the president is scheduled to visit O.C. on Thursday for a fundraiser at a real estate mogul’s home in Corona del Mar.
President Obama is correct in saying "the housing crisis remains the single biggest drag on our recovery," but his plan would likely create a new mortgage refinance bubble that would create a short-term boom with another quick bust. And the plan does not address the biggest obstacle inhibiting a recovery "“ credit availability.
As economist and real estate expert G.U. Krueger noted, the new plan pushed by the White House has two pillars. The first pillar is the "bulk sales of foreclosed homes owned by governmental mortgage giants "“ Freddie, Fannie, and the FHA "“ to qualified investors" and the second is "a new mass refinancing program of underwater mortgages" that expands a previous Obama administration refinance program to homeowners with mortgages held by private banks.
The bulk sales plan is tantamount to "subsidizing large scale investors and picking them as winners over the masses of individual investors and homebuyers," Krueger wrote. Currently investors of all sizes are already purchasing foreclosures.
Bryan Starr, CEO of the Building Industry Association of Southern California, Orange County chapter, said, "While we agree that curbing foreclosures is a necessary step towards market stability, we are cautious about the possibility of further restrictions on new borrowers and additional constraints on access to capital for future production."
For the refinancing pillar of the plan, what the president is really attempting to do is stimulate refinance activity, which he hopes will, in turn, accelerate the economy. Encouraging or enticing a new wave of refinancing would stimulate the economy, undoubtedly, and is a bright spot in the proposal. The problem with it however is that the president attempts to achieve this aim through intensified government mortgage-backing.
As Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, wrote for USA Today, the new plan "shifts the risk for borrowers who owe more than their home is worth from banks to taxpayers through Federal Housing Administration loans with a 100 percent government guarantee." It could even be considered a mini bailout of sorts which, at best, would give a short-lived jolt to the economy with lasting negative consequences.
Also, other such federal programs have also failed. As Florida real estate attorney Gary M. Singer wrote, this plan is "the third bite at this particular apple." And the president himself acknowledged that fact when he said "the programs we’ve put forward didn’t work at the scale we’d hoped."
That’s not to say nothing should be done. Government lending, and deep involvement in mortgages, helped to cause the real estate crash, and knee-jerk reactions subsequently tightened up the credit market.
Lucy Dunn, president and CEO of the Orange County Business Council, reacted this way: "The factors that drive a healthy housing market are starting to move in the right direction. The last thing it seems we need now is to institute untested policies that have potential for uncertain results and unintended consequences."
To promote a housing recovery, Congress and the president ought to reform, if not repeal, the Dodd-Frank financial regulation bill enacted after this most-recent housing bubble burst. Such a bold move would have a significant impact on the economy and housing market because it would relieve some of the pressure on banks who are hamstrung and have great trepidation about lending.
As Chapman University economist Esmael Adibi has told me, "The Dodd-Frank bill started with good intentions but ended up with a bunch of unintended consequences." One consequence seems to be incredible rigidity in lending.
Federal Reserve Chairman Ben Bernanke told Congress on Feb. 7, "Uncertain job prospects, along with tight mortgage credit conditions, continue to hold back the demand for housing" in the country. Removing lender constraints and alleviating their trepidation of additional overregulation will open up credit which, in turn, will expedite the purchases of foreclosures and rapidly increase refinance activity.
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