Last week, the Paper of Record published an editorial prompting the question “as goes housing, so goes the economy?” While this maxim may be axiomatic for some, it is important to understand why the interrelationship between housing, the financial system, and the broader economy is not only close but also tremendous. As the Times points out, the unceasing depression in the housing market “isn’t just bad news for homeowners. Selling and buying houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling equity dents consumer confidence, making things even worse”
The Times correctly indicates that the touted seven-month drop in foreclosure filings caters to falsely optimistic prognostication. Optimists see the drop as a sign of greater job stability nationwide, less income fluctuation, and more consumer confidence. However, the more palatable reason for the decline may be banks’ recent practice of slowing down the foreclosure process, a practice that in part signals a greater incentive for lenders to comply with federal regulation, something painfully lacking over the past few years. However, the slowdown is also the direct result of banks’ increasing unwillingness to deliver properties back to the market, as the prospects of a sale remain brutally grim.
As for the answer to this apparent problem, the Times editorial staff states, again correctly, that the “Obama administration’s main antiforeclosure effort has fallen fall short of its goal to modify three million to four million troubled loans.” The piece goes to establish that the reason for this shortfall:
Its basic flaw is that participation by the banks is voluntary. Most have joined the program but face no real pressure to meet its goals. Another big problem is that banks often do not own the troubled loans; rather, they service the loans for investors who own them. As servicers — in charge of collecting payments and managing defaults — banks can make more from fees and charges on defaulted loans than on modifications. Not surprisingly, defaults proceed and modifications lag. Banks win. Homeowners and investors lose. The economy suffers.
True, however, the Times, like most of the media, fails to appreciate the overwhelmingness of the aforementioned regulatory failure. As Talk to St. Ambrose has repeatedly contended, the mains problems with Obama’s antiforeclosure program—which, for the record, is the Home Affordable Mortgage Program, or HAMP—are much more severe than what the Times identifies as the “basic flaw,” or the fact that bank participation isn’t mandatory. Rather, banks routinely refuse to comply with regulations, and the government has lost the ability to enforce their own requirements (see Bryan Sheldon’s March 22 Post for guidance).
As for the solution to this problem, the paper suggests “tough national standards” for mortgage servicers, whereby banks could not initiate a foreclosure or a “foreclosure-related fee” while an attempt at modification is taking place. Without explanation, the Times then states that “national servicing programs could succeed where antiforeclosure programs have failed, namely, in compelling banks to clean up the mess they did so much to create.”
Here, the paper expressly advocates for a measure that has been pointed out many times before, by state attorneys general among others (and should be regarded as little more than common sense, not a “solution” to the housing crisis). Moreover, the paper seemingly glosses over the severity of the problem in failing to call for comprehensive financial reform, which simultaneously regulates investment banks’ securitization of home loans as well as local banks’ lending practices, something, which we have also commented on in the past.
So yes, as goes housing, so goes the economy, indeed. But the problem is huge, and fixing it requires tremendous regulation, bipartisanship, and hard work in this already trying time. The rhetoric should consider this imposing reality, painting a more accurate picture of the problem.