Monday, October 17, 2011

Financing Housing

While standing outside the hotel where the Mortgage Bankers Association was holding its annual meeting, I struck up a conversation with one of the attendees. He turned out to be a recognized expert on the way mortgages are financed both in the U.S. and in other countries. He gave me some useful information, and I followed up by doing my own research. His basic premise was that the key to fixing the housing problem is finding a way for people to refinance their mortgages.

Mortgage rates have declined over the past few years to an all-time low, somewhere around four percent for a thirty-year fixed-rate loan. Normally when rates decline, people who are paying higher interest rates on their old mortgages refinance at the lower rates. The result is that the people who refinance spend less money each month on their new mortgage payments, and when they get through paying off their loans, they find they have spent less for their homes overall, giving them greater gains when they sell the homes. In the short and long term, homeowners have more money in their pockets. Whether they save or spend this money, the economy is healthier. The benefits of low rates are also enjoyed by people who are buying homes for the first time, although there are a lot fewer of them than there are people who already have homes and could benefit from refinancing.

For the past several years, people have not been refinancing, mostly because they can't get loans. Why? 1) Because their homes are not worth as much as they used to be, so the homes don't qualify for mortgages that are large enough to pay off the original loans. 2) Because homeowners don't have the closing costs. 3) Because people are not employed, so they don't meet lenders' criteria for good risks. 4) Because banks are toughening their standards for lending money, so they don't get burned again.

Unable to refinance, some people lose their homes to foreclosure. What happens? The foreclosed homes are sold for low prices so lenders can get some of their money back. This depresses the value of nearby homes, because the pricing of homes is based on the sale price of similar homes. People feel poorer, so they cut their spending, slowing the economy. New homes aren't constructed. Lower property values cause local governments to increase their tax rates just to collect same amount of revenue they collected before.

What has to happen in order make refinancing easier? The banker I spoke with is arguing for technical adjustments to the way the mortgage lending market operates. But in order for these adjustments to be made, the investors who hold the mortgages (largely in the form of mortgage-backed securities) will either have to decide that it is in their best interest to change, or the government will have to force the change. So far, the investors are not convinced. They figure that even though refinancing would make it possible for more people to pay their mortgages, they make more money off the majority of people who continue to pay their existing high-interest mortgages than they would if mortgages were refinanced.

To date, the government has not forced any significant change, and I think things will have to get a lot worse before it does. The public still subscribes to the idea that people who made bad decisions and can't make their mortgage payments should suffer the consequences, and, having seen the banks get bailed out, people who are still able to make their mortgage payments are against seeing anyone else get a break. Most people are still focused on themselves and not on how their well-being depends upon the well-being of others. This gives politicians, who are still more responsive to the investors who financed their campaigns than to the masses of people who voted for them, very little reason to push for change.

During the first Great Depression, the government initially did nothing to fix the economy. Later it tried to make things better by making technical adjustments. It took years before the government instituted more radical changes. It will probably take even longer this time for the government to get serious. First, the regressives are going to have to finish their work of repealing the New Deal reforms. Then there will be a time of great suffering. Then, maybe, we will get to the point where we once again start thinking in terms that are big and bold enough to allow us to rebuild a society that provides for the general welfare.

1 comment:

  1. A lot of foreclosed homes have been abandoned making the problem worse, not to mention blighting neighborhoods. Someone came up with the idea of land banks. This has been legislated in New York and is under discussion in Georgia and Pennsylvania. The idea is that the land bank takes donations of un-re-sold foreclosed properties from lenders. The land bank pays for the demolition and works to figure out the highest and best use of the property under current circumstances. I'm not sure if this is going to help or not, but at least the taxpayers won't be stuck with demo costs for foreclosed properties abandoned by banks. I do think the land banks may run afoul of zoning laws as the highest and best use of property now might not be exactly what municipalities felt were good uses of their property in better times.