Housing is the area in which the governments remedial efforts have been… (Mario Anzuoni, Reuters )
Almost anywhere you look, assessments of the state of the economic recovery are muddled — job growth is positive but fading, consumer spending ebbs and flows, corporate profits are surging but corporate spending is not. The exception is housing, on which everyone agrees.
The housing market stinks.
The latest national Case-Shiller index of home prices fell again in April from a year earlier. It was up modestly from March, but since that month marked a new recession low, pushing average prices back to levels not seen since 2002, at best we're bumping along the bottom. About 4.5% of all mortgages are still in foreclosure, more than four times the historical average, creating an overhang of 3 million homes lost since mid-2007. Delinquencies, which mean at least one missed monthly payment, still afflict more than 8% of all mortgages.
Yet housing is the area in which the government's remedial efforts have been consistently the weakest. The gap between the government's effort to bail out bankers and its effort to bail out homeowners is a national scandal. Under the Troubled Asset Relief Program, the government's bank bailout, some $50 billion was earmarked for mortgage relief; by late last year, according to the Congressional Budget Office, only $8 billion had been committed and much less had been spent. The government's main effort to help people stay in their homes, the Home Affordable Modification Program, or HAMP, was created to assist 3 million to 4 million homeowners. As of the end of May, fewer than 700,000 had been placed in mortgages modified to better suit their financial condition so that their monthly payments were 31% or less of gross income.
HAMP hasn't been a total flop. The redefault rate of less than 20% on its mortgages is about half that of other mortgage relief programs. But it's enough of a disappointment that Treasury officials recently took a step almost unique in their regulatory record: They penalized three big banks for their shortcomings in managing HAMP. The banks are Wells Fargo, Bank of America and JP Morgan Chase; Treasury said it would withhold their scheduled monthly incentive payments under HAMP because they fell so far short of program standards. To be sure, this is a relative slap on the wrist, and anyway, the banks dispute Treasury's contention.
The shame of HAMP is that federal mortgage relief didn't have to be so halfhearted. HAMP's drafters had a successful model to work from. That was the New Deal-era Home Owners' Loan Corp., or HOLC, a program that saved 1 million homes from loss in the depths of the Great Depression and completely remade the country's mortgage market in the process. Here's the punch line: It also turned a profit for the federal government: about $14 million on a capital investment of $200 million, plus about $5 billion in borrowing.
The conditions that gave rise to HOLC weren't very different from today's. Homes had fallen in value by more than a third, and no bottom was in sight. Homeowners had no equity or owed more than their properties were worth. The typical mortgage, an interest-only short-term loan with a balloon payment, was customarily rolled over at the end of its 3- or 5-year term. That contributed to the crisis, because when the Depression hit, those automatic rollovers ceased, making foreclosures routine.
HOLC consigned those loans to history. The agency took delinquent loans off the banks' hands in return for government bonds and converted the loans to 15-year self-amortizing mortgages in today's style, so that owners could build up equity. Interest rates were reduced to no more than 5%. The existing loans were refinanced, with no loans made for more than 80% of a home's appraised value or more than $14,000.
Perhaps HOLC's most remarkable feature was its outreach. HOLC's 20,000 employees made personal contact with delinquent borrowers, sometimes even arranging jobs for unemployed homeowners or helping them find tenants. Working around temporary financial setbacks was a priority. HOLC records show as many as a dozen visits to a borrower's home, even if the loan was only a few hundred dollars. Such effort may seem impossible in today's bustling world, but HOLC was not a small operation for its era; at its peak, its loans covered 1 in 10 non-farm homes in the country.
What really enabled HOLC to succeed was that its incentives were all aimed at keeping borrowers in their homes. That's not the case with today's mortgage market, where the incentives are canted toward foreclosures. HAMP has done very little to correct that.