Analysis of the Supreme Court's last decisions of the term and the impact of a vacant seat on the bench.
Later today President Obama is scheduled to announce an expansion of an existing program aimed at helping struggling homeowners. The new federal rules will allow more homeowners current with their mortgage payments to refinance at a lower rate. The U.S. housing market continues to struggle, and its recovery, many say, is tied to an uptick in the overall economy. Despite historically low mortgage rates, 3.5 million homes are in some stage of foreclosure, nearly 15 million homeowners owe more than their homes are worth, and existing home prices continue to fall. Please join us for a conversation about the road ahead for the U.S. housing market and the U.S. economy
- Dean Baker co-director of the Center for Economic and Policy Research and author of a new book, "The End of Loser Liberalism: Making Markets Progressive."
- Martin Feldstein professor of economics, Harvard University, chairman of the Council of Economic Advisers, 1982-1984 under President Ronald Reagan.
- Kathleen Day spokeswoman, Center for Responsible Lending; ethics teacher at Georgetown University’s graduate program in real estate studies.
- Mark Zandi chief economist of Moody's Analytics and author of "Financial Shock" and the forthcoming book, "Paying the Price."
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Three years after the 2008 financial crisis, some things have changed, but not the dismal housing market. Foreclosure numbers are, once again, up, prices are down, and American homeowners have lost trillions in wealth. Joining me to look at the U.S. housing market, the implications for the overall economy, Kathleen Day, spokesman for the Center for Responsible Lending. Dean Baker is co-director of the Center for Economic and Policy Research.
MS. DIANE REHMJoining us from a studio in Philadelphia, Mark Zandi, chief economist of Moody's Analytics, and, of course, you are welcome as always to be part of the program. Join us on 800-433-8850. Send us your email to firstname.lastname@example.org. Join us on Facebook or Twitter. Mark Zandi, let me start with you and ask you about what President Obama is expected or likely to say today. What will his new plan include?
MR. MARK ZANDIWell, he's going to announce an increase in the eligibility for the so-called HARP program. This is the program to facilitate more refinancing activity for borrowers who have Fannie Mae and Freddie Mac loans. So he's going to do a number of different things to make that plan more viable and reach more homeowners. For example, now there would be no cap on a person's loan devaluation, meaning, you could be very deeply underwater and still qualify.
MR. MARK ZANDIThey're going to make it easier for you to qualify if you've been delinquent in the past. You can't have been delinquent in the past six months. But previously, the requirement was you couldn't be delinquent for the past year. They are going to provide some additional incentives for the mortgage originators and servicers so that they'll participate and be more aggressive in making more refinancing.
MR. MARK ZANDIAnd one of the key things is that the GSEs, Fannie Mae and Freddie Mac, are going to reduce the interest rates they charge so that should make it more attractive to homeowners. So there's a whole slew of things that are going on here, lots of moving parts, but, when you add it all up, it should make this a more attractive program for people who are very stressed and allow for more refinancing activity, which is a very good thing.
REHMMore attractive, but how many people could it affect?
ZANDIWell, by my -- you have to do a number -- make a number of assumptions about future interest rates and what happens with closing cost. But by my calculations, under some reasonable assumptions, I think these changes to the program will increase the number of refinancings between now and the end of 2013 when the program ends by about $1.6 million. That's above what it would have been otherwise.
ZANDISo that's -- I would consider that to be meaningful and significant. It's not a magic bullet. It's not going to solve our problems. It's not going to solve the problems in the housing market. More needs to be done. But I think this is a positive step in the right direction.
REHMAnd how could the plan affect the overall economy?
ZANDIIn two key ways. First, for those homeowners that are able to refinance, it lowers their monthly mortgage payments. So it's almost, for them, like a tax cut. So they can take that extra cash that they're saving, and they can go out and spend that on other things. And that'll help to support the economy. The other thing it does is it makes it much less likely that these homeowners who get this break will default on their mortgage. And the fewer the defaults, the fewer the foreclosure sales, the less pressure on house prices, and, of course, that's a very good thing.
REHMMark Zandi, chief economist of Moody's Analytics, author of the forthcoming book "Paying the Price." Kathleen Day, what's your reaction to the president's plan as Mark Zandi has outlined it?
MS. KATHLEEN DAYWell, as he said, it's not a magic bullet. It's all good, any incremental or additional steps that can be taken, but we think other things should occur as well. It is good -- the GSEs really should do more -- Freddie and Fannie really should do more to help people stay in their homes. If it's in the taxpayers' interest, they really should do more. We think that bankruptcy judges should be given the right or the power to modify a person's mortgage on their primary residence.
MS. KATHLEEN DAYWe also think there need to be more principal write-downs, not just a write-down on interest rates. There must be principal write-downs to make it more likely that, when someone gets a loan modification, it's sustainable. We need cleaning up the servicing industry, so everyone knows -- has heard about the robo-signing. You know, papers should not get lost. People should -- everyone should have a fair shot at a loan mod.
MS. KATHLEEN DAYIf they don't qualify, then that's fine, but they should get a fair shot. And there shouldn't be dual tracks so that the bank is simultaneously working to foreclose on them as they're doing a loan mod.
REHMDean Baker, how do you see it?
MR. DEAN BAKERWell, I see it as mostly positive. I will say, I think, Mark might be a little overly optimistic. I mean, there's been a long history. Every single program, the estimates have been too high in terms of how many people take advantage. I mean, I really hope he's right that we see 1.6 million refi as a result of this, or additional refis. But I'm a little skeptical whether that'll actually be the case.
MR. DEAN BAKEROne of the issues, the lower closing cost -- I'm sort of struck by this 'cause I know President Obama said that, and other people have been talking about this, that we could reduce closing cost. And so I'm going, well, if that's true, why haven't we done that like a long, long time? Why are we throwing money in the garbage with higher than necessary closing cost? So, again, I hope that's true, but if there's waste in that process, by all means, let's get rid of it.
MR. DEAN BAKERTaking up on what Kathleen said, I really like the bankruptcy modification 'cause what's really nice about that is debt's a right you give to the homeowner. So what you're saying then is if someone is in a really bad state, they go into bankruptcy, the mortgage loan can be treated like other loans. Another thing that I've been pushing along these lines, that's recently adopted in Ireland, right to rent, that people who get foreclosed on have the option to stay in their home for up to five years paying the market rent.
MR. DEAN BAKERSo again, that's a right that people have that increases their marketing power vis-à-vis (word?).
REHMAnd then what would happen at the end of the five years?
BAKERWell, no guarantees. But what would stand to reason is, if someone had been a good tenant, they've been paying their rent regularly, why on earth would not the bank want to sell it to them, you know, so you'd be able to have the opportunity to get back your home? No guarantee. I mean, if you could write that in the legislation, you give them a guarantee, I'll be all for it. But I just say, start with the simpler thing first.
DAYYeah, and I agree -- we agree -- I agree with that, and, especially, the GSE should give people the opportunity to rent if they're about to be booted out. One thing I want you to keep in mind. We need all these things desperately because what most people don't recognize is that we've had 3 million foreclosures since the beginning of 2007, and we're not even halfway through this. We are not halfway through this. We really need to make -- get -- make a dent in the foreclosures 'cause those -- that lowers everyone's property value.
REHMSo if Mark Zandi is talking about the new plan hitting or helping 1.7 million homeowners, you're saying that even that is just putting a small dent?
DAYYes, but a good dent. I mean, that's a good dent. We'll take it. It's good.
DAYAnd all of those other things as well. Just remember, one in -- out of every 11 mortgage holders is either in foreclosure now or in severe risk of going into foreclosure, and that compares with one out of 38 in 2003.
REHMAnd how likely is the Congress to go along with this, Dean Baker?
BAKERWell, from my understanding, President Obama could do all of this under his own authority. Now, FHFA, the Federal Housing Finance Authority is an independent agency, but I assumed he has worked this out with Ed DeMarco, the acting director, and my understanding is he's prepared to go through with this. So this is entirely done within the Executive Branch. Congress doesn't have to do anything.
REHMIs that your understanding, Mark Zandi?
ZANDIYeah, that's correct. I mean, the -- one of the key impediments to doing more to help the housing and mortgage market is that Congress is in no mood to do more to ante up any more taxpayer money to do anything. So that does limit the ability of the president to address this issue, and -- but this is one thing he can do and he has done. So this is -- this will happen. It doesn't need an act of Congress...
REHMAnd how soon would a plan like this -- should he announce it today, how quickly might it go into effect, Mark?
ZANDIWell, I think it probably, really, won't go into effect until the beginning of next year because the FHFA, Fannie and Freddie -- everyone else has to work through the specifics of the guidelines. I don't think that'll be issued until mid-November. So my guess is that this really won't go into effect until the start of next year, start of 2012.
REHMA Christmas gift for lots of folks. Kathleen Day, explain what's happened to the housing market in the last year.
DAYThere has just been a free fall in foreclosures. They've -- it's just gone on and on. And every time there's a foreclosure, you lower the value of surrounding property values. You -- that lowers the tax base that start -- that causes more layoffs, more people are underwater, closer...
REHMBut for a short time, the number of foreclosures was down, and it went up again.
DAYAnd no one really knows 100 percent why, but the thinking is that there were some pause a little bit -- or not a pause, but a slowing of the number that were going into foreclosure because of the robo-signing scandal and the AGs -- 50 AGs are investigating that and discussing with banks a settlement. And also, there was such a glut of property. I mean, how much can a bank absorb? Not -- they're already over capacity.
REHMAnd then, Dean Baker, over the weekend, a Wall Street Journal piece pointed out the extent of which U.S. consumers are really pulling back and trying to pay off all their debt. What are the implications there?
BAKERWell, that's a big part of the downturn, and this is one of things -- The Washington Post had a similar piece today. There's a well-known housing wealth effect, and a lot of our recovery in the years 2002 to 2006 was being driven by this housing bubble. Now that wealth has disappeared, so it's totally predictable that consumers would cut back. They've just lost money. So it's not just that people are pessimistic, which, of course, they are. They just don't have the money.
REHMBut if they don't have the money, how are they going to do what's in the president's plan?
BAKERWell, in the case of refinancing, they could do that. I mean, that's the whole point here. So you have someone who might be underwater. They might owe a 150, even a 170 percent the value of their house, but the point would be that they would have the opportunity to refinance. And that would actually free up a little bit of money. I wouldn't want to go too far with that in the sense that that's not going to have a big map for economic impact, but it will be something in the right direction.
REHMDean Baker, he's co-director of the Center for Economic and Policy Research, author of a new book. It's titled, "The End of Loser Liberalism: Making Markets Progressive." Short break. And when we come back, we'll be joined by Prof. Martin Feldstein of Harvard University.
REHMAs we talk about the U.S. housing market, the president's plans to announce a new plan for helping those mortgage holders who are very much underwater, we're joined now by Martin Feldstein. He is professor of economics at Harvard University. He was chair of the Council of Economic Advisers under President Ronald Reagan, from 1982 to 1984. Good morning, sir, and welcome.
PROF. MARTIN FELDSTEINGood morning. Nice to be with you.
REHMThank you. In a recent piece for The New York Times, you wrote you do not believe we can just let housing prices continue to fall. Tell us why?
FELDSTEINWell, what's been happening is housing prices fall. And in real terms, they fell 8 percent in the last year. Households have a lost a trillion dollars in the last 12 months, and as a result of that loss of wealth, they're cutting back on their spending. And by cutting back on their spending, they're stalling this recovery. So fixing the housing situation is a key to getting the economy moving again.
REHMSo what you're proposing is permanently reducing mortgage debt. How would you do that?
FELDSTEINWell, I explain in a piece in today's Wall Street Journal that, I think, this should be done on a voluntary basis in which homeowners and creditors, the banks, or Fannie and Freddie, agree to it. That's going to require some taxpayer subsidy. But I think at a time when Americans have lost literally a trillion dollars in the last year and face continuing losses in their homes, that's a good use of taxpayer dollars.
FELDSTEINWe will all benefit if our house prices stop falling, and we'll all benefit if the economy is in better shape. So the idea is for the government to expand its current program in which it works with the banks and with homeowners to reduce monthly payments, to go beyond that and reduce the principal so that somebody who is 150 or 160 percent underwater will be able to get back to close to 100 percent. And that's what I think ought to be done.
REHMBut what about those voters who would argue that their tax dollars should not be used to help homeowners, who, perhaps, took risks that they shouldn't have?
FELDSTEINWell, I understand that feeling, and I can understand why people think in some ways it's just not fair that, as taxpayers, they should do it. On the other hand, we all have a stake in not having our house prices decline. We all have a stake in having a stronger economic recovery. So I think one should think about spending those tax dollars on this as a way of preventing the decline in our own home prices and the weakness of the economy. I think it's a better way of doing it than a number of other things that the administration has done with taxpayer dollars.
REHMAs Mark Zandi has outlined it, what are your thoughts about what the president is scheduled to announce today?
FELDSTEINWell, it's a step in the right direction. It doesn't deal with the problem of principal. It just deals with allowing people to borrow at lower interest rates on their existing mortgages. But, you know, it's a very small impact, if Mark Zandi is right, that 1.6 million homes will benefit. And if the typical beneficiary can save about 2 percentage points on their interest rate, well, that would amount to something like $6 billion a year.
FELDSTEINAnd to put that number in perspective, the president's jobs plan is $450 billion a year plan, so this is really very small stuff. It's like a tiny, tiny tax cut for people who can refinance their mortgages.
REHMAnd, of course, in that same Wall Street Journal piece that you talk about this morning, you offer some advice on tax reform. You say we have a remarkable opportunity to reduce the deficit while lowering rates. How so?
FELDSTEINWell, remember what happened back in 1986, which I refer to there. That was the Ronald Reagan-Tip O'Neill agreement to bring down tax rates across the board and to get rid of a lot of tax loopholes and so-called tax expenditures to close some of the ways in which individuals reduce their tax bill by various kinds of deductions. If we did that, we could bring down tax rates and at the same time raise real revenue because of the positive impact that lower tax rates have on all kinds of taxable earnings.
REHMBut weren't the overall economic growth rates at that time so different from the way they are today? Wouldn't you question whether that same approach would work today?
FELDSTEINNo, I don't. I think, if anything, we're in a situation where, because there is so much slack in the economy, such a high unemployment rate, that providing any kind of stimulus in this economy has more scope for expanding in the short run as well as in the long run.
REHMNow, finally, I know you have no crystal ball, but what's your best guess as to how long this housing slump is going to last?
FELDSTEINYou know, it's been going on since 2006. So we're getting five years into it, and it's still -- there still are millions of homes -- something like 15 million homes are underwater, and reducing interest payments will help some people. But if you're 150 percent underwater, if you owe 50 percent more on your mortgage than your house is worth, you're still going to think pretty hard about stopping your payments to the bank, letting the bank foreclose eventually and moving on to rent.
FELDSTEINSo, until we deal with the principal problem, I don't think this is going to have a happy ending. So it could go and on.
REHMProf. Feldstein, I think Dean Baker has a question for you.
BAKERWell, part of the story is -- just in terms of looking at the housing market, I think I see it a little differently. We, to my view, had a huge bubble in the years beginning in the mid-'90s till 2006. And I see what's going on to most part just being the correction of the bubble. And, actually, prices in many areas, even in Midwest cities, even in Detroit, have leveled off and have started rising the last few months.
BAKERAnd in terms of the savings rate, we're actually below historic saving rates. The savings rate currently is around 5 percent. The post-war period prior to the bubbles was around 8 percent. So I'm not sure what the counterfactual is that we should expect to see a falling savings rate, a lower savings rate than what we have today, and higher house price. I don't see why we would expect that.
FELDSTEINWell, I don't think I said anything about the saving rate, but I agree with you that house prices have been coming down from a bubble, which had pushed them some 60 percent above the long run trend. And that was something that was bound to happen. And in some places, prices are now below the long run trend. But I don't know how far they could continue to fall because if you're a potential homebuyer, you may say, well, these look like good prices, but a year from now, they maybe even better prices. So people are holding back on purchasing.
ZANDIWell, I sympathize with Dr. Feldstein's view on principal reduction. I mean, I think, until we're able to reduce the amount of debt owed by these very underwater homeowners, it's going to -- it's very difficult to see how the housing market is going to gain traction. And if the housing market is not going to gain traction, it's hard to see how the broader economy is going to really get going here.
ZANDISo I think this is an issue that we need to address. I do think, though, that it's very -- it could be very costly. I don't think there's any political appetite for taxpayers anteing up money for this, particularly given that so many people think it's so unfair. And there is a concern about moral hazard. That's the idea that, you know, if you do give people a break on their mortgage, you'll find lots of other people trying to take advantage of it. So you've got lots of problems.
ZANDISo I think the approach should probably -- to be -- to look towards some other solutions, like a shared appreciation mortgage. So the idea there is you would reduce the mortgage balance owed by a homeowner, and they would give up some of the future appreciation in their home's value to the mortgage owner, to second lien holders and even to taxpayers if they were to participate. So I think we need to get a little bit more creative in how we address it, just given the political limitations to what can really be done to address the issue.
FELDSTEINYeah, well, I'm afraid that it would be very hard to make a shared appreciation plan work. If I'm a potential participant in that plan and you say, well, we'll reduce your mortgage by 50 percent if you agree to give half of all of the future gain on that house to someone else, why won't I say, well, I'm happy to take the reduction in the mortgage? Thank you very much. Now, I sell the house, and I go on -- I buy another house.
FELDSTEINAnd my gain on that house is not going to be subject to shared appreciation. So unless you have a way of locking people into the home for a number of years, I think shared appreciation doesn't work. And, of course, we don't want to lock people into the homes. We want to have people be mobile so that if there are a better job opportunity someplace else, they can go there. So that's my concern about the shared appreciation rule.
DAYWell, I think almost all ideas should be on the table. What really strikes me is how much agreement there is. For example, on principal reduction, which is something that was absolutely off-limits in most people's vocabulary even two years ago, the real tragedy is we didn't get all these ideas going two or three or four years ago. This is the fifth year.
DAYThe other thing people should remember when you talk about, where are taxpayers going to have to pay for this, the fact is the losses are already in the system, and we're all suffering. And so it's quite right that we need -- what we need to do is try to figure out the best way to recognize them in a way that benefits the most people and harms the fewest, just to have a free fall like this. We're almost in a reverse bubble, that -- it's true. There was going to be economic dislocation once the bubble burst, but it needn't have been this painful if we had taken some of these steps years sooner.
BAKERProf. Feldstein raised a very good point with reference to shared appreciation, Mark Zandi's proposal. But I think the same issue runs up with his own plan because then it would be voluntary on the part of the banks, and this has been a big issue all along because if it's up to a bank, whether they're going to refinance the mortgage, what they're likely to say is, okay, here's someone in trouble, but they're struggling. I think they'll pay.
BAKERThey're not going to refinance that one. What they're going to do -- and the person will take -- the bank will take advantage of Prof. Feldstein's plan -- is the one -- they see someone who's hopeless. They're underwater. They'll take the money from the government, and then the person may well end up re-defaulting.
REHMDean Baker. He's co-director of the Center for Economic and Policy Research. And you're listening to "The Diane Rehm Show." Prof. Feldstein, what have been the reactions to your proposal?
FELDSTEINWell, it's a proposal that I've discussed with people in the Congress and the administration. And some people say this is a good idea and we ought to do it, and others say it's going to be very hard to get the votes to make it work. My feeling is that it's -- if it's something that the public begins to focus on as a possibility, and if people understand that if we don't do something like this, house prices are just going to keep falling, so that it's not do I want to help that other guy with my tax dollars? It's do I want to help myself as a homeowner?
FELDSTEINAs more and more people see that they're losing wealth -- and for most Americans, their home is their biggest source of wealth. As more and more people see that happening, I think this will begin to have more traction. Maybe, like so many other things that need to be done, we're going to have to wait until after the election. But I think it ought to be on the table together with other things.
DAYAbsolutely right. But I would agree with Dean Baker that it would be -- it would have been nice if three, four years ago, Congress and the administration -- whichever administration, both administrations -- had really backed bankruptcy reform to give bankruptcy judges this ability to modify a person's mortgage on their primary residence because they have experience in it. They could look at the person's total debt picture and really make it sustainable.
DAYAnd just -- no one is saying give homes away. They're saying market to fair market value, which, unfortunately, keeps going lower and lower. Market to fair market value. If you -- they can stay in the home, then that's better for everybody. It's better for taxpayers. It's better for investors, shareholders, everybody. So it's just kind of crazy we're taking this short-term view of like, oh, no, no more handout. So it's crazy.
BAKERYeah, well, just one thing I wanted to correct with Prof. Feldstein. At least by many measures, certainly the Case-Shiller Indices that many of us use -- at least I consider one of the best measures of house price -- house prices have leveled off recently. So, again, there's variation by city. And, again, this is one of the problems I've had with all these programs is they haven't distinguished between bubble markets, where you can't expect to sustain a bubble, and markets where there either never was a bubble or the bubble had largely deflated.
BAKERSo I don't think we have this issue, in general, of spiraling downward. There are some markets where that may well be the case. I don't think, in general, that's true.
REHMMark Zandi, if, in fact, the president's proposal that he's laying out today does go into effect, say, in January, which areas of the country will be most positively affected?
ZANDIWell, the most stressed, where you have a lot of underwater homeowners. So that would include places like Florida, around Atlanta, Arizona, Nevada, parts of California, parts of the Midwest. These are areas where house prices boomed and then completely busted, and that's where you see a large share of homeowners underwater. So that's where, I think, the benefit would be most pronounced, which is exactly where you'd want to see it. That will give you the most bang for the buck from this kind of a program.
REHMAnd do you think there will be the kind of backlash there has been in the past from taxpayers who say, why should my tax dollars go in this direction?
ZANDINo, because that's the beauty of this. There is no taxpayer dollars involved, that Fannie Mae and Freddie Mac will be made whole on this deal. So there is no cost to taxpayers from this effort.
BAKERYeah, just to carry that a step further, basically what we're saying is that, you know, if you're above water in a mortgage, you know -- I know I've done this. Take advantage of that. We refinanced, took advantage of lower rate. This is just saying that people underwater in their mortgage have that same opportunity.
REHMDean Baker of the Center for Economic and Policy Research, Mark Zandi, chief economist of Moody's Analytics, Kathleen Day, spokesperson for the Center for Responsible Lending, and Martin Feldstein, professor of economics at Harvard University. Thank you, Dr. Feldstein, for joining us this morning.
FELDSTEINNice being with you.
REHMThank you. We'll take a short break now. When we come back, it's time to open the phones. Stay with us.
REHMAnd welcome back. It's time to open the phones. We'll go now to Gary who's in Ann Arbor, Mich. Good morning to you.
GARYHi, thanks. I'm a consumer bankruptcy lawyer. And here's the problem I'm seeing over and over and over again. A client comes in. They go through the mortgage modification program that exists. The servicing companies get paid an incentive for doing that. And then they go through the program. They get a plan. They go through the trial period.
GARYAnd then, lo and behold, the mortgage company or the servicer says, sorry, for some reason, the modification won't work. And then the servicer gets paid to do the foreclosure. You know, they are the problem, and we need to get the servicers out of this.
DAYWell, the servicers definitely need to be held accountable, and they need to...
REHMWho are the servicers?
DAYOkay. It's the same people who make the loans. They sell them into the secondary mortgage market, and then they typically...
REHMBut why are they even still in the business?
DAYBecause that's how it's been set up. They are the ones -- they made the loan. They sell it. But then they get a -- they get paid to service the loan and...
REHMIt's outrageous. Dean Baker.
BAKERIt is. Absolutely. No. And it's one of these things -- you know, servicers are set up that they collect a check. When the check doesn't come, they send you out a warning. Then they send out a second warning, and then they go ahead with foreclosure. And that's what they're set up to do. That's what they're used to doing. And they're just not about to turn corner and go, here, we could do modifications. I mean, it's just an obstacle.
REHMSo, Mark Zandi, what can a bankruptcy attorney help with?
ZANDIWell, just quickly on the servicers, there are a lot of efforts to clean up the servicing business. You know, they're -- the states' attorneys generals have filed lawsuit against the nation's largest servicers. You know, this is the Wells Fargos and the B of As and JP Morgans of the world, and they're negotiating right now. And, hopefully, they'll come to an agreement soon. I think they will. And as part of that agreement, there will be some changes to the servicing process, and I'm hopeful that these will be good changes.
ZANDIAnd the servicers, actually -- you know, for all their faults and mistakes, and there are many -- have made, I think, some significant progress in terms of making the process work better. It's still a long way to go, but they have made some progress. In terms of your question about bankruptcy, this is part of the problem. This is what Kathleen has been talking about. The bankruptcy process does not allow for a principal reduction on a first mortgage loan under current law. And I think that is an issue going forward.
ZANDIAnd I think, you know, ultimately, it will take legislation to change the bankruptcy laws, but this is probably a good place to change. One point to make, though, is that this doesn't come out without a cost. If, in fact, the bankruptcy laws are changed to allow for principal reduction in a bankruptcy, Chapter 7 or 14 bankruptcy, we will have to pay higher interest rates because, you know, someone's going to get compensated for that. So that is important to keep in mind.
REHMGary, thanks for your call. Here's an email from Chris on moral hazard. He says, "So we're worried about moral hazard with homeowners taking advantage of a principal reduction program, and there is no issue with moral hazard when banks are rewarded for robbing $1 trillion of value from the home market. This is insane." Kathleen.
DAYWell, there is some injustice here, and I do -- I'm old enough that I went through the same loan crisis. And one of the things that Bush -- the administration really understood is that if you're going to have a large amount of taxpayer money bailing out an industry that goofed -- really messed up on a grand scale, you need to put -- you need to look at who -- hold some people responsible.
DAYNow, putting people in jail is not going to fix the problem, but it certainly, I think, would help some people feel there's some justice in the world. There's -- and that is -- it's amazing. It's quite clear, even without new laws, that existing laws were broken in many cases.
BAKERI'd go even a step further. It goes beyond injustice. There's a question of getting the incentives right, you know, and what -- the lesson that anyone on Wall Street takes away from what happened is, you know, you go play fast and lose, at the very least, pressing things to the very edge and, in many cases, almost certainly going over the edge of the law, and, worst-case scenario, well, your bank goes under. But the government comes through with TARP money, and you're doing fine. You're still making millions of dollars a year.
REHMLet's go to Houston, Texas. Good morning, Rog. (sp?)
ROGYeah. Hi, Diane. I have a couple of points. I do not trust, essentially, any program that comes out of the government and especially from this administration. The reason being, I think, eventually, all the tab is going to come to taxpayers, and we are getting -- we are becoming a country where success is punished and failures, mistakes are being rewarded. I still don't know why.
ROGAnd I would love an answer from one of your experts is why did President Obama and his administration spend $1 trillion in stimulus to pay out all the union buddies and not give that money as a tax benefit to all the people, regular folks who are suffering in their house?
BAKERWell, roughly half the stimulus actually was taxes -- tax cuts, and that's probably one reason it wasn't as effective as we might have liked it to be. But there's been a lot of research on the impact of the stimulus, and it shows it creates somewhere around 2 to 3 million jobs, which is great, except we needed somewhere around 10 to 12 million jobs. So, you know, some union workers benefited. Most workers who have benefited were not union workers.
BAKERI don't have a thing against union workers benefiting, but, you know, the reality was some people looked at it closely. They gave it to Republican states, red states, blue states. You're pretty hard-pressed to find much impact of politics. I'm not going to say there was zero, but the Obama administration hardly stands out for abusing politics in the appropriation process.
REHMAll right. Let's go to Fort Lauderdale, Fla. Good morning, Greg.
GREGHi. Good morning, Diane. Hi. Can you hear me? I just wanted to...
REHMSure can. Go right ahead.
GREGThank you. I have a comment and a question as well. First of all, in my opinion -- I'm a real estate lawyer, and I've been helping people on a short-sale process. I believe that in order to fix the problem that we're having in the real estate market, one of the things that we're going to have to have is a reduction of principal balances. It's too easy for people to walk away. It's too easy for people to let the property go for very little money in the sale process when they have nothing to lose.
GREGLenders learn and -- so, anyhow, years ago, the short sale was a new term, and lenders did not really participate in short-sale process. After they realized that it was more economical, often, to allow a short sale rather than to through a lengthy foreclosure process, take the property, rehab it, sell it, they'll have short sales.
GREGI believe if the bankruptcy code were used and it were changed and bankruptcy courts are already in place so that regular people, homeowners with first mortgages, can modify the terms of those loans, and lenders realize we're going to take a haircut unless we go ahead and work with them eventually, make them consign. But eventually, they will learn, and they will move along and voluntarily modify just as they voluntarily relinquished principal balance in terms of short sales, presently.
GREGMy question is, in the markets that were bubble markets, such as where I am in South Florida, I know that we had, you know, huge overinflated demand that led to a huge increase in supply. Where are we on the recovery curve? Or have we overcorrected yet? Are we still on the way down? Does anyone have a real opinion as to how long it will be till we were on a, I guess, what you'd call a normal, slow and steady increase were it not for the boom and bust cycle that we've had?
DAYAs I said earlier, we project -- our numbers and the best numbers we see from analysts are that we are not even halfway through the number of foreclosures that were sparked or are going to come from this crisis. So we have several more years and at least as many as we've had. One group that -- one issue that we've not discussed -- and this is going to have an impact -- is that it -- the black and Hispanic home-owning community has been really disproportionately hurt by this crisis.
DAYAnd I've heard many homeowners talk about where the growth is going to come in markets. And it's going to come from, in many ways, colors of community. And yet many homeowners that are coming into the market, growing up and coming of age, their parents can't help them because they've been stripped of their home, which is a main way that people pass on wealth to the next generation. There is -- this really -- people do not understand what a devastating impact this will have for years to come.
REHMMark Zandi, where do you think we are on this curve?
ZANDII think we're a lot further along than people think. I think the key -- Kathleen is right. It's going to take a number of years to work through all of the foreclosures that are in process, that the key to house prices -- and I think that's where the caller from Miami was going -- is the share of home sales that are distressed, that are foreclosure, in short -- if that share is rising, then house prices fall. If that share is declining, house prices can stabilize and even rise, even if they are at a high level.
ZANDIAnd in places like Miami and South Florida, we're pretty close to that point. The foreclosure short sale has been very, very high. Two-thirds, three-quarters of sales have been distressed, and that's why prices have fallen so far. But they've fallen so far that they're now below incomes. In effective rents in those markets, you see a lot of investor demand. And I do think as that distressed share of sales starts to come down -- and I think it will six, 12, 18 months down the road -- we'll see some price stability and some price growth.
ZANDISo I'm not nearly as bleak in my outlook for the housing market because we can have house price growth even in an environment where we have a lot of foreclosure or short sales.
BAKERI'd be a little more pessimistic than Mark. I mean, the measure I like to look at is the vacancy rate, and vacancy rates are still near record highs. They're down a hair from their peak back in 2010, but they're still near record highs. Now, most of that's in the rental side, but places flip back and forth between rental and ownership units very quickly, particularly when you consider that roughly one-third of the rental market are single-family units.
BAKERSo those are houses. Those could be sold if the prices were already warranted. So, I think, for the nation as a whole, we're probably still seeing some downward momentum, probably a little bit in South Florida. Other markets, -- Las Vegas, Phoenix those are probably oversold and probably don't do much further to go down, more likely to go up.
REHMAll right. Let's go to Dayton, Ohio. Good morning, Kathleen.
KATHLEENHi. I just wanted to say my understanding of the economy is really pretty basic. But I want to understand are the servicers -- I watch the bailout hearings, are the -- the banking bailout hearings. Are the servicers the same as some of the same banking institutions that were bailed out? And why aren't those who were in trouble with their homes, who were capable of paying their premium, not given the same deal of no interest or very little interest to pay back those loans, the same deal that The Wall Street institutions received?
DAYWell, that is the question. They are the very same. The servicers are the same people...
REHMYou mean Wells Fargo, for example?
DAYThey're all -- it's all the same. It's units of all the -- it's servicing units of all the players that brought us there.
REHMSo no wonder people feel as though they've gotten a raw deal.
DAYNo, it's outrageous. What's happened is outrageous.
BAKERYeah, and this was discussed in Congress at the time. I talked to many members of Congress and their staffers, and, you know, they were, of course, very distraught about the idea of just handing all this money to the banks. And they're saying, how about having bankruptcy cram down? And, you know, the Bush administration, as well as the Democratic leadership, said, no, no, no. It's got to be a clean bill.
BAKERHow about having tight rules and executive compensation? They didn't put those in there, you know? So, basically, the banks got what they wanted, and everyone else is pretty much left out in the cold.
REHMTo Charlottesville. Dave, you're on the air.
MR. DAVE PETERSONThat's me, I guess, Dave Peterson. Hi to everyone.
PETERSONLet's be honest here. This, what I call the American holocaust, has been brought on by the banks enabled by Congress, and that's probably, you know, because money and politics. That's what we need to get out. But let me share a story with you. I built my own house. I built lots of equity in the property. We're not underwater, although my income has been decimated by this economy, so we're having a hard time making ends meet coming up with our payments.
PETERSONSo, right now, we're current on our mortgage. And I've argued with the administration for the last three years. I'm being denied refinancing because the house is not 100 percent complete. And despite the fact that HR 1424, the EESA law, mandates that the secretary of the Treasury and FHFA maximize assistance to homeowners, protect college funds, protect retirement accounts, protect life savings, none of that is happening with us.
PETERSONAnd what is -- you know, it used to be in the old days that a person would go out and buy a home with an unfinished attic, and when they had a child, they would finish another room. And they'd have another child. They'd finish another room. That was the conservative commonsense way to do it. I had Valerie Jarrett on the phone with me. She's one of the president's top advisers, head of the Office of Public Engagement...
PETERSON...she agreed with me that if everyone built as I did, we wouldn't be in this mess that we're in now. And yet I can't get anyone up there to lift a finger to help us not go under. And I would like your comment.
REHMAll right. Dave, thanks for your call. Before I turn to you, Mark Zandi, for a response, let me just remind our listeners, you're listening to "The Diane Rehm Show." Mark.
ZANDIWell, I'm not really sure. I mean, I sympathize with the caller. It sounds like a very difficult financial situation. But, you know, I don't know the particulars of his situation, and I'm not sure how to respond to it. I mean, you know, there have been many efforts to help homeowners with different types of problems. And there are many kinds of issues and situations and problems, you know, as many problems as there are homeowners.
ZANDISo to design programs to be able to help each and every one of them, in the context of this environment that we're in, is going to be very difficult. I mean, that's no comment on, you know, whether this caller's particular situation should be addressed or not, but it just goes to the complexity of the issues here. Everyone has their own story, their own issues, their own problems, and to design programs to help people in a broad -- is very difficult.
BAKERWell, just very quickly on this, there's been a real effort to try to standardize everything about the mortgage process. So you have to have mortgage that meets X, Y, Z. And maybe, you know, this person's condition should warrant a refinance, but it's not exactly X, Y, Z, so it doesn't get through the process.
REHMI want to ask you all on -- you surprised that this has not been a bigger issue among the Republican candidates? Even during the debates, it was as though nobody wanted to address this. Dean Baker.
BAKERWell, I've been kind of mind boggled by -- I find the debates kind of mind-boggling because most of what seems to be troubling the country doesn't seem to be an issue. And I'm not saying that particularly is a partisan point. I just watched -- okay, what's their plan for jobs? They don't talk about it. They don't even talk about their plan for deficit reduction. So it is amazing to me, but I don't really understand what's going on in this debate.
ZANDIWell, you know, I think part of the issue here is it is very complex, and it's very difficult to get anything through in a debate that's not very, very simple. The other issue is that a lot of what's being discussed with regard with the housing market is, you know, sort of outside the legislative process. And so I think that makes it a little bit more difficult for them to talk about it as well. I mean, but, you know, at the end of the day, the problems here are very, very, very, difficult as we can see from...
ZANDIAnd serious. And, you know, as a result, I think they're just reluctant to talk about it because of the complexity.
REHMQuick comment, Kathleen.
DAYAnd I think, privately, many people -- there's more agreement privately than maybe there is publicly, especially as we come up in an election year. But one thing that is crazy are attempts to roll back reform, I mean, that the reason we got here is because there weren't some commonsense rules.
REHMKathleen Day, Dean Baker, Mark Zandi, earlier, Martin Feldstein, thank you all so much.
REHMAnd thanks for listening. I'm Diane Rehm.
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