EconoBytes - Thursday, August 16, 2012

EconoBytes is a quick daily economic roundup for journalists, sponsored by the Roosevelt Institute and compiled by Fenton Communications. We bring together blogs, analyses, and studies by progressive economists, policy experts, and think tanks on the most pressing issues in the current public economic debate. To subscribe to EconoBytes, email econobytes@fenton.com.

Thursday, August 15, 2012

Today, seven questions reporters should ask the 2012 presidential candidates about the housing crisis


Less than three months before a presidential election viewed by many as a referendum on the economy, the ongoing housing crisis that crippled the economy is barely mentioned on the campaign trail. Below are seven questions both candidates should answer. Full brief with additional facts, charts, and specific policy proposals at the Center for American Progress.  For questions and interviews contact Katie Peters at (202) 741-6285 or kpeters@americanprogress.org.
 
 
1. Five years after the housing bubble burst, experts estimate we may be only halfway through the resulting foreclosures, with millions still to come. Do you think the federal government should do more to help prevent unnecessary foreclosures? If so, how?

  • From the beginning of the financial crisis through March 2012, banks and other financial institutions completed approxi­mately 3.5 million foreclo­sures with another 1.4 million loans still in the foreclosure process. Via CoreLogic.
  • As many as 7.4 million to 9.3 million at-risk borrowers were yet to face foreclosure or liquidation as of March 2012. Via CoreLogic.
  • CAP proposal: Streamline refinancing for all borrowers current on their monthly payments and meet minimum underwriting standards and establish clear and fair standards for mortgage servicers dealing with struggling borrowers.

 
2. From the peak of the market in 2006, the total amount of home equity in the United States declined by more than $7 trillion, leaving all homeowners with less wealth and more than 11 million families owing more than their homes are worth. How do you plan to address this pressing problem of “underwater” mortgages?

  • Of the roughly 8 million un­derwater homeowners that are current on their monthly mortgage payments, more than 40 percent are likely unable to refinance to today’s historically low interest rates simply because they have private loans that are ineligible for certain federal programs. Via CAP.
  • Analysis by the Federal Housing Finance Agency found that targeted prin­cipal reductions of loans backed by Fannie Mae and Freddie Mac could save the companies $3.6 billion, mostly from fewer fore­closures. Those savings do not count the boost to the economy from increased consumer spending. Via FHFA.
  • CAP proposal: Encourage targeted principal reductions at Fannie Mae and Freddie Mac using “shared appreciation,” where the entities agree to write off some of the outstanding balance in exchange for a portion of any future price appreciation on the home.

 
3. For the communities already hit hard by the foreclosure crisis, how do you plan to revitalize neighborhoods and stabilize local housing markets?

  • On average, a foreclosure reduces the value of a house by 27 percent and reduces the value of all other houses in the neigh­borhood by 1 percent. Via MIT.
  • In 2009 alone analysts estimated that 2.4 million foreclosures caused prop­erty values to drop for 69.5 million neighboring homes, totaling more than half a trillion dollars in “spillover” home devaluation. That’s an average devaluation of $7,200 per neighboring home that year. Via Center for Responsible Lending.
  • CAP proposal: Rehabilitate certain government-owned foreclosed properties and convert them to affordable, energy-efficient rentals through “Rehab-to-Rent.”

 
4. The need for affordable rental housing continues to rise, with 5 million more low-income renters than there are affordable rental units. At a time of fiscal austerity, how do you plan to meet this unmet need?

  • Today there are 5.1 million more low-income renters than there are affordable rental units. Of the affordable units that are available, more than 40 percent are occupied by higher-income renters. Via Harvard.
  • Total federal funding for public housing decreased by more than 20 percent between 2010 and 2012 despite approximately $26 billion in unmet repair and renovation needs in the nation’s aging public housing stock. Via CBPP.
  • CAP proposal: Capitalize the Housing Trust Fund, ramp up funding for Low Income Housing Tax Credits, guarantee certain debt issued by Community Development Financial Institutions, and establish a stable, liquid, and responsible market for multifamily housing finance.

 
5. The U.S. homeownership rate fell from 69.2 percent in 2004 to 65.4 percent in the first quarter of 2012—the lowest level in 15 years–as a result of foreclosures and tightened credit standards. Do you think it is important for more Americans to be able to buy homes? If so, what role do you think the federal government should play in achieving that goal?

  • Credit standards have gotten much tighter since the crisis began. In 2007 the average Fannie Mae-backed loan covered 75 percent of the home’s value and went to a household with a credit score of 716. Last year’s average loan covered just 69 percent of the home’s value, and the average borrower had a credit score of 762. Via FHFA.
  • Today 48 percent house­holds of color are home­owners, the lowest level since 2000. By comparison, 74 percent of white house­holds own their home. Via Harvard.
  • CAP proposal: Establish a new system of housing finance in the United States that reins in excessive risk-taking, supplies mortgage capital in every community even in times of economic duress, and preserves long-term, reasonably priced products like the 30-year, fixed-rate mortgage.

 
6. What do you plan to do with the government-backed mortgage giants Fannie Mae and Freddie Mac? If you plan to eliminate them, what will you replace them with and how will you transition to a new system without causing undue harm to the fragile housing market?

  • More than 95 percent of new home loans made last year were backed by the federal government through Fannie Mae, Freddie Mac, and the Federal Housing Administration. Via NYT. At the height of the bubble in 2006, these entities backed less than 35 percent of loan originations.
  • Fannie and Freddie own or guarantee a combined $5 trillion in mortgage assets, more than half of all outstanding home loans in the United States. Via OMB. (2013 Budget, p. 1431-1432)
  • The financial situations at both Fannie Mae and Freddie Mac have improved in recent months. Fannie has reported profits in its past two quarters, while Freddie in August reported its best quarterly earnings in 10 years. Via WSJ.
  • CAP proposal: Gradually wind down Fannie Mae and Freddie Mac and replace them with a new system capitalized by private capital, with an explicit government backstop against catastrophic risk on certain well-regulated mortgage products.

 
7.  At the peak of the housing bubble, more than half of subprime loans went to borrowers who could have qualified for conventional, safe mortgages, many of whom were borrowers of color. How do you plan to prevent racial and ethnic discrimination in the U.S. housing market and promote access to affordable, sustainable mortgages to all capable borrowers?

  • Subprime loans jumped from 9 percent of total mortgage originations in 1996 to 20 percent in 2006 (Via CCH). That year an astonishing 61 percent of subprime loans went to borrowers with credit scores high enough to qualify for conventional loans with far better terms. Via WSJ.
  • During the housing bubble, African American or Latino borrowers with good credit were three times more likely than their white counterparts to receive a risky subprime loan, and more than three times more likely to receive a high-interest loan. Via Harvard.
  • CAP proposal: Vigorously implement key mortgage-market reforms laid out in the Dodd-Frank Act, including a requirement that lenders must ensure a borrower’s ability to pay back a home loan at the time of origination. Also, make fair and equitable access to affordable mortgage credit a key pillar of any future system of housing finance.

 
Special thanks to Gadi Dechter at CAP for today’s EconoBytes.
For questions or interviews, please contact Ira Arlook (202.258.5437) or Sharon Rose Goldtzvik (202.789.7753).
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