Stephen Foley: US housing market need not be a hopeless case
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US banks are having no easier a time shifting their backlog of foreclosed homes, despite year-on-year declines in prices and mortgage rates that haven't been this low for generations. The glut of repossessed property means that ordinary homeowners, too, are unable to get out from under their homes to pursue work elsewhere, or to downsize, or to escape their spouse. Anecdotes abound of American couples trapped in unhappy marriages and taking to opposite wings of their McMansions rather than attempting to sell into a weak housing market, or to crystallise their losses if they bought at the peak.
Just this week, there was another shocker of a report on pending home sales, which were down in September by 5 per cent, when many economists had been expecting a rise.
So what hope, then, for Barack Obama's much-hyped intervention in the housing market, which he unveiled on a trip to foreclosure-hit Nevada at the start of the week? With Congress refusing to let the President pass any significant economic aid, he has grabbed the levers he does have, namely control of the housing finance giants Fannie Mae and Freddie Mac, which were nationalised in 2008.
These own or guarantee most of the mortgages in the US (including all new ones), so they are uniquely powerful. Except that they are being run only to minimise their own losses, which run into the tens of billions and are now on the taxpayer.
The measures announced this week cut Fannie and Freddie fees on re-financings and to open the option of government guarantees to borrowers even if they have negative equity in their homes, but they do not diverge from the Administration's policy of loss-minimisation and gradual shrinkage of the two companies.
To really stop the rot in the US housing market, Fannie and Freddie have to become more creative tools in the housing market, as Fannie Mae was originally designed to be during the Great Depression. Banks have to write off portions of borrowers' loans if their home value has collapsed, so they can spring free of the trap of negative equity. Until then, foreclosures will continue to chill the market, and to chill potential buyers' expectations for the market. Only Fannie and Freddie can be used to incentivise the banks to do this.
President Obama has spent $2.4bn of the $50bn he promised to aid struggling borrowers. Little wonder. They don't tackle the problem. Homeowners have too much debt relative to their earnings potential in the current gloomy jobs market, and too much debt relative to an asset that is declining in value. Most state-sponsored refinancings only put off foreclosure. The Tea Party will have conniptions, and maybe it would have to be financed by a counterveilingly populist tax on banks, but taxpayer-financed debt forgiveness really is the only way out.
Just ask Greece.
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