As widespread and difficult as the recession has become, itâ€™s easy to forget it all began with a housing crisis. Not only is that crisis still ongoing, it still threatens the stability of our economy.
The Obama Administration is expected within the next few weeks to announce an initiative of $50 billion or more to help strapped homeowners. But with 1 million residences having fallen into foreclosure since 2006, and an additional 5.9 million expected over the next four years, the Obama plan — whatever its details — can’t possibly do the job by itself. Lenders and investors will have to acknowledge huge losses and figure out how to keep recession-wracked borrowers making at least some monthly payments.
In a typical economy, home loans are a stable business because they come with excellent collateral. If the homeowner defaults, the bank reposes and sells the home, recouping their investment if not turning a small profit. Problem is, the housing crisis isnâ€™t just about an inordinate number of bad loans, itâ€™s about the collapse in home prices. Banks can reposes homes but they canâ€™t unload them except at huge losses.
The situation is bad, but banks still donâ€™t seem willing to make the hard, necessary choices.
[T]he industry’s contention that it has done as much as possible to limit foreclosures seems hollow. Some statistics it cites appear to be exaggerated. Even pro-industry figures such as Steven C. Preston, a Republican businessman who headed the Housing & Urban Development Dept. late in the Bush Administration, concede that many lenders have dragged their heels. “The industry still has not stepped up to the volume of the problem,” Preston says. One program, Hope for Homeowners — which Bush officials and banks promised last fall would shield 400,000 families from foreclosure — has so far produced only 25 refinanced loans.
Part of the problem is banks are worried that, because of accounting practices, refiguring the value and the mortgage for even one home in a region would require them to refigure the value for all the regionâ€™s homes. That could give the banks an on-paper loss of well over one trillion dollars. Obviously, thatâ€™s a problem. But sitting tight and praying for a miracle rebound in housing prices in the middle of a bad recession hardly seems to be a smart strategy.
Iâ€™m not sure what needs to be done. I thought the $700 billion in TARP money was supposed to help rectify these problems. But the billâ€™s rush through Congress and mismanagement by the Bush Administration derailed what was originally supposed to involve a heavy dose of bad mortgage bailouts. So far, weâ€™ve seen little bang for our billions.
Even the massive amounts scheduled to be spent on economic stimulus are not going to pull us out of recession so long as the housing crisis persists. Itâ€™s time for banks to suck it up and make the hard choices. Unscrupulous lenders and careless homebuyers conspired to create this mess. Homeowners canâ€™t be the only oneâ€™s expected to suffer the consequences, especially when itâ€™s the banks getting the lionâ€™s share of federal aid.