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Will new federal mortgage policies substantially affect the housing market?

One of millions of foreclosed Middle Class houses in the United States that sit empty today.
One of millions of foreclosed Middle Class houses in the United States that sit empty today.
Richard Thornton

U. S. Department of Housing and Urban Development (HUD) has announced changes in the Home Affordable Refinance Program, better known as HARP. The application process has been streamlined for what HUD defines as “most” applicants. Those homeowners who have not been more than 30 days late on their mortgage payments during the past year will be “rewarded” by waiver of some paperwork, loan underwriting and complicated professional appraisals. The amount that loan balances may exceed market values have also been increased. HARP primarily assists households with FannieMAE-owned mortgages, because participation by private institutions is voluntary.

President Obama hailed the HUD policy changes in this ongoing program as a major step in the federal government’s efforts to solve the nation’s foreclosure crisis. HARP was one of the first programs enacted after Obama was inaugurated. On February 18, 2009 he told an audience at a high school in Mesa, AZ, "Through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can avoid foreclosure, and we are not just helping homeowners at risk of falling over the edge; we are preventing their neighbors from being pulled over that edge too — as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs."

Republican opponents have labeled the program in ad campains as yet another case of the money from taxpayers being squandered by the federal government on welfare programs. Presidential candidate Mitt Romney responded to announcement of HUD policy changes by publically stating, “Don’t try and stop the foreclosure process. Let it run its course and hit the bottom.” Later in his response, Romney added, “the government should allow investors to buy homes, put renters in them, fix the homes up and let it turn around and come back up.”

When asked about what he would do as president to solve the housing crisis, another current Republican frontrunner, Herman Cain, stated,” “I would get the government off the backs of the banks. Many of the banks can’t do some of the things they want to do to help folks because of regulations or the threat of regulations coming out of Washington.” On other occasions Cain has stated that the cause of the housing crisis was the economic policies of the federal government. Of course, the Republicans held the White House for eight years immediately prior to the current recession.

Newt Gingrich also feels that federal regulation of banking industry caused the housing crisis. In an interview with Fox News interviewer, Greta Van Susteren, the presidential candidate and former Speaker of the House stated, “You have to repeal the Dodd-Frank bill, because the way the Dodd-Frank bill works, it dramatically, regulates the banks, it sends a signal to the regulators to tell them not to make the loans, not to roll over the money, and in effect it encourages foreclosures and encourages the bank actually seizing the property. So until you repeal the Dodd-Frank bill, which I think the House Republicans ought to do this week, I mean this is a terrible bill which is killing housing, it is killing small banks, it is killing small businesses, and it ought to be repealed. The minute you do that, literally, the minute you do that, it’s going to be easier for people to work their way out, you’ll have a dramatic decline in foreclosures.”

Contemporary American history 101

Political rhetoric currently saturating the media has re-written history to claim either that the Obama Administration has made major strides in stimulating the economy or that the policies of his administration caused the recession. Belief in either interpretation of history is based on the presumption that Attention Deficit Hyperactivity Disorder has become pandemic in the United States, so that voters can only remember what happened the previous day on their favorite reality TV program.

The current mega-recession began during the presidency of George W. Bush. The brunt of continually worsening economic conditions has been born by the middle class; many of whom are now below poverty level. The initial collapse of the real estate and banking industry had many causes that included (1) a stark transfer of wealth from the middle class to a tiny percentage of the population, (2) greed and corruption among financial executives, (3) multiple homeowners purchasing houses that they could not afford (4) extreme federal borrowing to finance wars in Iraq and Iran while simultaneously lowering the taxes on corporations and the upper income tier of citizens, (5) the worse natural disaster in the history of the United States – Hurricane Katrina, and (6) catastrophic energy cost increases in 2008 due to an artificial spike in crude oil prices that was created by oil speculators.

The economic collapse was triggered in late 2006 by a law passed in Georgia after right-wing Republicans had just taken control of the Georgia General Assembly. A new foreclosure law was written by six lawyers, who had just started a firm to mass-process foreclosures. The Georgia Mortgage Bankers Association was directly involved with the plot. The law “streamlined” the foreclosure process and allowed mortgage holders to foreclose without interference from the judiciary, if any loan was a month and a day in arrears. The law went into effect just as reconstruction on the Gulf Coast after Katrina had caused massive building material shortages and record inflation of construction costs in the Southeast. Georgia’s foreclosure rate skyrocketed. The collapse of its real estate market then spread to other states and the nation.

Note: The details of the events leading to the collapse of the American economy are contained in a series of articles cited at the end of this commentary.

Herman Cain’s and Newt Gingrich’s comments about the restrictions on the banking industry being the cause of the Recession and foreclosure crisis are particularly in denial of the facts. Both Cain and Gingrich are from Georgia . . . where the recession began because of corruption in its banking and mortgage industry. Since 2007 Georgia has had more bank failures than any other state.

The Emergency Economic Stabilization Act of 2008 was passed during the last year of the Bush Administration and had support from both major political parties. The Dodd-Frank Banking Industry Reform Act was passed by Congress in response to a report by a bipartisan Congressional committee about massive corruption in the banking and financial industry. This report stated that the corruption was the primary cause of the collapse of Wall Street in 2008.

The American economy has steadily worsened during the Obama Administration. While the President can state with confidence that without federal intervention, the economy would have collapsed into a severe depression in 2009, there are also many economic indicators that show the American middle class to be in far worse shape now than in 2008. The administration has concentrated on policies that protected the solvency of the 10 largest banks and propped up the Dow Jones Average.

The Obama Administration’s efforts are essentially a continuation of the policies of the last year of the Bush Administration. The Department of Commerce intentionally does not maintain an accurate count of the total unemployed. What it calls unemployment is the number of persons still receiving unemployment benefits combined with the number of persons, who are currently without work and job-hunting at state labor offices. The Obama Administration also conceals the true level of inflation by not counting the cost of food and auto fuel as economic indicators.

Throughout much of the United States, either banks or FannieMae continue to own increasing portfolios of middle income housing and commercial properties. Most communities continue to experience commercial tenant evictions and bank foreclosures on broad swaths of retail buildings, even churches. The majority of middle and low income Americans have experienced a stark drop in discretionary income since 2007, due both to inflation and reduced income.

The Federal government contiues to subsidize home foreclosures at a much higher level than loan mitigations. The attorneys, realtors and service companies involved with a FannieMAE foreclosure and eviction, earn anywhere from $10,000 to $350,000 a foreclosure. The only income many realtors are receiving now is derived from FannieMAE payments for handling contacts with foreclosed homeowners and listing their houses. These funds were in the past paid by a mortgage insurance program, but now are covered by federal subsidies to the FannieMAE budget.

HARP has had little impact on the housing market since its inception in February of 2009. HUD estimates that slightly over 600,000 homeowners are currently participating in the program. This number is a tiny fraction of the 9 million homeowners estimated by President Obama in 2009. The primary cause of the high level of foreclosures and high housing inventory is the continuing drop in the standard of living of middle class Americans. If households have insufficient income to meet HARP standards, they lose their home.

HARP will now subsidize those who are least affected by the Recession. The revised rules of the program essentially take it out of the business of helping distressed homeowners, who have lost their jobs. By restricting assistance to those whose mortgages are in good shape after four years of recession, the program will essentially become a program to aid affluent, upper middle voters. Their standard of living will be raised by a federally-subsidized reduction in monthly mortgage payments. The program will do nothing to create demand for new construction. It is probably no accident that this targeted segment of the population is one of the most likely to vote in presidential elections.

Economics 101 versus Real Estate Economics 602

When I was a freshman at Georgia Tech, I was enrolled in an introductory economics course force fed to undergraduates. The majority of the 100+ students were wannabe engineers, who dreamed of vast wealth obtained by climbing the corporate ladder of the defense industries.

The economics professor gleamed as he exclaimed the beauties of the free market system . . . and by inference, capitalism. Actually, the two are theoretically be two different economic systems. He stated that the reason that the United States enjoyed the highest standard of living in the world was our free market economy, where supply and demand regulated prices, while creating maximum economic opportunities for its citizens. The truth was that from the day the United States was born, federal, state and local governments had created disproportionate economic opportunities for some citizens through construction of infrastructures and letting of contracts for military supplies and government services.

Several years later, I was enrolled in graduate level real estate classes at Georgia State University. I dreamed of being another millionaire architect-developer like John Portman. In the first real estate economics class we were spoon-fed the same old free market theory as applied to real estate. In the second course, the nationally famous economist admitted that the housing market was an entirely different beast than the theoretical world of retail sales and industrial output. It contained many of what he called “irrational social values, externalities and market rigidities.”

When asked what changes would be necessary to bring the American housing market to the wonderful utopia of a free market, he paused, and then responded . . . “In a perfect world. . . 5% of the nation would be real estate owners and everybody else would be renters. Only then would the United States housing market function according to a Darwinian ideal of survival of the fittest.” Apparently, in the mind of the famous professor, those who lost their jobs could, well, just go somewhere and freeze to death. With fewer living workers, the economic well-being would rise for those, who managed to survive. That was the beauty of the free market economy. It is the world endorsed by candidate Mitt Romney.

Behind all the political rhetoric by politicians of all parties during the fourth year of the Great Recession, the reality of 2011 is that this nation is indeed headed toward becoming a nation of renters and serfs. Unfortunately, it was in just such degenerative environments that both Fascism and Communism rose to power in Europe, after World War I.


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