Conflicting Interests in Obama's Housing Plan

There's a fundamental problem constraining Obama's housing proposal: housing prices are still too high.  It is really difficult to stabilize a market that is still structurally unsound - i.e., the bottom really needs to fall out before we can really, truly rebuild. Susie hopes that this plan buys us some time until we're ready to "come to Jesus" around this.

Accepting the criticism that it is still too small or timid, there's a lot to like in Obama's housing proposal.  What I like most is the reliance on our existing affordable housing and community development infrastructure.  This plan subtly promotes the belief that we should make use of and strengthen our existing social safety net.  What threatens this plan is whether the nation's largest banks will come to the table to make it work, and whether Obama, Shaun Donovan, Sheila Bair, Timothy Geithner and other leading finance and housing officials can or will compel their cooperation.

Community development and banking leaders have praised FDIC Chairwoman Sheila Bair's efforts at loan modifications in her recent takeovers of insolvent banks.  Bair predicts that Obama's plan to modify loans will start to work as soon as next month.  It sounds like Obama took a page from her playbook in mortgage modifications, so that's promising.  It's one of several ways that the plan turns to what works at the FDIC, at HUD and in our government more generally.

I mentioned in my earlier post the adoption of HUD's affordability mandates in rewriting distressed mortgages.  Another noteworthy effort in this plan is to make better use of state housing finance agencies (HFAs) to reach borrowers. HFAs carry out affordable housing programs nationwide; they are responsible for financing almost 3M affordable rental units and almost as many homes that moderate- and low-income homeowners can legitimately afford.  I'm pleased to see that this is one of the places where the Obama Administration is subtly relying on our affordable housing infrastructure to carry out such an enormous and seemingly unwieldy initiative.  It is a smart move, past experience tells us, to rely on existing government infrastructures during times of crisis when the private sector cannot respond as effectively (because the banks are imploding, for instance).

And that brings us back to the role of the banks. Frankly, the larger banks have different incentives around foreclosures versus modifications than smaller, community-based banks and banks in the business of working with distressed borrowers.  Wilbur Ross, the owner of the biggest third party loan servicer in the country says that a combination of "greed" and concern about "impact to bank balance [sheets]" drives resistance to the reality that we need "aggressive principal modifications for borrowers most in need." He suggests a plan where the government guarantees half the reduced principle, the bank is prevented from selling off the mortgage, and if the house eventually sells at a profit the lender and owner split it.

So far the Obama Administration's willingness to take on the financial industry to embrace these new realities has been pretty weak.  And Wall Street is fighting every new piece of legislation tooth and nail, or introducing fees at every turn.  (My personal experience as a consumer with bureaucracies is that fees and obfuscating paperwork are often deliberate but also sometimes evidence that the many parts of the system aren't working together.  I recently had one branch of my bank send me change-of-address forms that prevented me from receiving my monthly mortgage invoice even though the office that sent those invoices had been doing so to my new address for 5 months.  WTH???)

So how much can we really expect to accomplish with this well-intentioned, modest plan if competing interests are not brought in line?  I have no idea, and I'm not inclined to believe that the Obama Administration, even with bank cooperation, would ever announce a plan as vast enough as we need to halt and rebuild from the current economic collapse.  Honestly, this is a man-made disaster and there is always permanent loss, usually by the most vulnerable, from such catastrophic events.  Obama never struck me as a particularly bold President, and even if he were, I think the damage done by Bush (and to a much lesser extent Clinton) is too deep to really fully redress.

Take the plan's investment in Fannie and Freddie.  I realize this $400B ($200+$200) is a trigger for angry Americans over more money being plowed into failing or flailing financial firms.  On the one hand, I agree with progressive economists who believe Fannie and Freddie play a fundamental role as government guarantors in of our housing market, including putting homeownership stably within reach for lower-income individuals and providing financing for low-income rental housing.  But beyond that ideological commitment, I have no idea whether Fannie and Freddie need to be phased out for new 21st century government solutions or whether in our three decade effort to hobble government so much it can no longer effectively work, we've just severely maimed the two mortgage holders in the process.

My sense with the Obama Administration is that they're trying to work with what they have - a severely distressed government with corporate entanglements so deep and leadership so far removed from its populace and a population so freaked out and disenchanted that these incremental steps are the best we can expect.

At least that's the conclusion I'm at at the end of this post.

Photo from the Obama-Biden Transition Project