Foreclosing a Solution

Foreclosures continue to plague the American economy. According to RealtyTrak, an online real estate service focused on foreclosed properties, nearly two thirds of the nation’s 212 metropolitan areas showed increases in foreclosure activity in the second quarter of 2012, with foreclosures in many towns that saw a decrease still surpassing more than two per 100 houses.

These numbers, as Meg Handley wrote in US News and World Report, may be the tip of the iceberg thanks to a “negative equity problem” that “has pushed many homeowners to the brink of foreclosure and put immense pressure on household finances.”

The numbers are daunting, she writes. While the loans that have entered the foreclosure process “amount to $45 billion in negative equity,” the numbers rise to “$1.2 trillion when you add in the more than 12 million underwater mortgages that haven’t started the foreclosure process — 26 times the negative equity currently associated with troubled loans.”

That means there are 12 million homeowners who could face foreclosure should the economy remain stagnant or something damages their ability to pay even the small payments they may be making.

Despite these trends the Federal Housing Finance Agency – which oversees Fannie Mae and Freddie Mac – says a mortgage refinance and principle write-down being pushed by the Obama administration would be too costly. FHFA Acting Director Edward J. DeMarco said on July 31 of the Obama plan to use money from the Troubled Asset Relief Program to help offset a debt foregiveness program that “the anticipated benefits do not outweigh the costs and risks.”

“Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that [the program would] not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

DeMarco, according to various press reports, said that up to a half million homeowners could benefit from such a program, but that the cost to taxpayers was too high.

Foreclosures and their costs go well beyond the immediate impact on the homeowner or the mortgage lenders. They affect other homeowners seeking to sell their properties and local and state tax receipts. To truly gauge the value of the administration’s mortgage relief program, the FHFA needed to include these potential impacts in its calculus. Failing to do so undervalues the administration’s plan and leaves far too many vulnerable to potential default. If that were to happen, it would be a huge additional drag on the economy, as Ezra Klein noted on his Wonkblog on the Washington Post website.

“The key to the refinancing plan DeMarco rejected is the fact that the vast majority of mortgages backed by Fannie and Freddie are paying interest rates above 5%, well above current interest rates of about 4%,” he writes. “If the mortgages were refinanced, that’s a substantial amount of money that each of the 30 million families with Fannie or Freddie mortgages would save on their payments every month. “

Total savings could reach $70 billion, meaning the program “would function, effectively, like a $70 billion tax cut, albeit one that actually makes Fannie and Freddie money.”

“Most studies suggest that tax cuts have a stimulative multiplier, meaning the economy would grow by more than $70 billion,” he writes. Factoring in a multiplier of about 1.24 – a number he attributes to Mark Zandi of Moody’s – the “total economic impact could be around $86.8 billion. That’s growth of about 0.56%, based on the latest GDP data, which translates to about 0.28% lower unemployment. Given the size of the labor force, it’s around 370,000 new jobs.”

John Griffith, housing analyst for the Center for American Progress, said essentially the same thing several hours before DeMarco announced his agency’s decision.

“Fewer foreclosures help more than just struggling homeowners,” he said on ThinkProgress. “Local housing markets are better off, as each foreclosure decreases the value of every other home in the neighborhood. And since the average foreclosure costs more than $50,000 to the lender or investor, avoiding default often helps the books of Fannie and Freddie, which in turn benefits every taxpayer on the hook for their losses.”

In the end, the goal should be to keep as many people in their homes as possible and stabilize the housing market, which in turn will help jumpstart the economy.

Hank Kalet is a freelance writer living in New Jersey. Email,

From The Progressive Populist, September 1, 2012

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