For years home ownership was considered a safe long-term investment and for good reason. The Standard & Poor’ (S&P)/Case-Shiller Home Price Index, which tracks home prices in various cities across the country, consistently showed a steady increase in home values. However, after large amounts of money quickly entered the housing market and national real estate values hit an all-time high in 2005, it soon became apparent that the United States was facing a housing bubble. During a housing bubble, houses sell at artificially high prices above their true value. Although the real estate market, being fed in part by consumers with subprime mortgages, was booming, economists and others warned that the housing bubble was about to burst, and the United States was headed toward a housing crash. Henry Paulson, the Treasury Secretary, warned during an October 2007 speech in Washington: “Despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant risk to our economy.” It did not take long for those concerns to be realized.
In 2007 S&P/Case-Shiller reported the largest drop in home prices the nation had seen since the Great Depression. As housing values plummeted and subprime mortgages were reset to higher rates, many people owed much more on their houses than their houses were worth and had higher mortgages than they could afford. Numerous foreclosures followed, putting the United States into a housing crisis. Further, housing values in most areas of the country were predicted to, and did, drop even further.
Housing Market and Wall Street
The housing crash held enormous implications for the U.S. financial system as a whole, because many subprime mortgages, purchased as mortgage-backed securities, were held by the nation’s largest financial institutions. By March 2008 Bear Stearns, one of the nation’s largest banks, was on the brink of collapse. The Federal Reserve stepped in with a $30 billion bailout. This was followed by the federal takeover of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac), an $85 billion bailout of the insurance and financial services organization AIG, and eventually a $700 billion bailout of Wall Street designed to allow banks to begin lending once again. Although Wall Street began seeing steady recovery following the bailout, many critics argued that little of the money benefited homeowners who were facing foreclosure, so the housing market as a whole still suffered.
Government Response to the Crisis
The government came under heavy scrutiny after the Wall Street bailout as many wondered why, if the government could help Wall Street, it could not help those facing foreclosure or trying to purchase their first home. The government attempted to respond to the housing crisis with a number of programs, including the Housing Assistance Act of 2008, the Housing and Economic Recovery Act of 2008, and the HOPE for Homeowners Act of 2008.
One of the earliest attempts at helping homeowners, the Hope Now Alliance was created by the federal government in October 2007 to offer those who risked losing their homes a hotline to get support and information on credit and refinancing. This program, though popular, has not been enormously successful. Cable news channel MSNBC’s senior producer John W. Schoen wrote on March 14, 2008, that the program “has left hundreds if not thousands of callers frustrated by long wait times, lack of follow-up and relatively minor loan modifications that have failed to help.” He cites part of the reason the program is facing such difficulty is because of the way loans were repackaged and sold. Schoen states that “modifying any given mortgage involves agreements involving hundreds of investors whose securities are backed by that loan. That has forced loan servicers—who were originally set up to manage payments—to enter the fray of restructuring hundreds of thousands of loans.”
President George W. Bush signed the Housing Assistance Act of 2008 on July 30, 2008. The act offered a refundable credit for first-time homebuyers for 10 percent of the home’s value up to $15,000; however, the money had to be paid back in $500 annual increments for fifteen years when the homeowner filed taxes. Rather than a true tax credit, it was essentially an interest-free loan from the government. Eva Rosenberg writing at MarketWatch.com on July 30, 2008, commented, “The eagerly anticipated housing-rescue bill … is intended to calm the mortgage market, the real estate market, homeowners on the verge of bankruptcy and foreclosure, victims of bank failures and others whose lives are topsy-turvy this year. But from a tax perspective, the bill is likely to cause more upset than calm.” Rosenberg points out that, in addition to having to repay the credit, if homeowners sell the house in fewer than fifteen years, the total amount of the credit is due.
President Bush also signed The Housing and Economic Recovery Act of 2008 into law on July 30. Although many in the Senate had pushed for a bill that would allow judges to renegotiate mortgages in foreclosure, the final law did not include this provision. Rather, the program is administered through the Federal Housing Administration (FHA) and gives insurance to lenders who reduce mortgages to 90 percent of the home’s current value for those homeowners whose monthly mortgage payment exceeds 31 percent of their income. This program has generally been regarded as a failure as it relies on lenders to reduce the principal owed and includes high fees to the borrower. Some were against this bill from the start, believing that it allowed banks to pass their riskiest loans on to the government. The program, which began on October 1, 2008, and will remain open until September 30, 2011, was expected to help an estimated 400,000 homeowners who were at risk of losing their homes. As of November 2009, less than 1,000 homeowners had taken part in the program.
Alongside the Housing and Economic Recovery Act of 2008, the Home Ownership Preservation Entity for Homeowners, or HOPE for Homeowners, was launched. Although it was more successful than previous attempts, it was also complex for consumers and not popular with lenders for the same reasons as the The Housing and Economic Recovery Act of 2008.
The American Recovery and Reinvestment Act of 2009 enacted into law by President Barack Obama on February 17, 2009, is showing more signs of promise. This act increased the first-time home buyer credit to $8,000, which does not have to be repaid. Further, the Worker, Homeowner, and Business Assistance Act of 2009 extended the deadline for the credit to July 1, 2010.
Two programs announced by President Obama in February 2009 are also hoped to help both homeowners upside-down in their mortgages or those facing foreclosure. The Home Affordable Refinance Program was established to enable homeowners who cannot refinance homes worth less than their mortgages to take advantage of lower mortgage rates. The other plan is the $75 billion Home Affordable Modification Program. This plan offers an incentive payment to mortgage holders for modifying existing loans and also to homeowners who make their payments on time. Although it is too early to tell if this program will be successful, Lou Barnes, co-owner of Boulder West Financial Services, is not optimistic that these programs will work. Barnes was quoted in a ColoradoBiz article on May 2009, stating the programs are “going to help far fewer people than imagined … if these programs are not heavily modified, they will be lucky to help 1 million households.” Barnes points out that these programs have been slow to start and criticizes the 105-percent loan-to-value limit on any refinancing, which he feels is too low to benefit most homeowners.
In April 2009 the Case-Schiller Price Index showed some positive signs that the housing market was making a comeback, reporting that home prices had made their first month-over-month increase in nearly three years. David Streitfeld talked about the progress in The New York Times on July 28, 2009, stating that following “a plunge lasting three years, houses have finally become cheap enough to lure buyers. That, in turn, is stabilizing prices, generating hope that the real estate market is beginning to recover.” Although he points out that the unemployment rate and other factors may still contribute to dropping values, at least some hope exists that the market is recovering. Streitfeld also notes that real estate agents are commenting that one reason “the market is perking up in some places … is the encouragement offered by such measures as the first-time buyer’s tax credit of $8,000.” The National Association of Realtors lobbied for the credit to be extended beyond its expatriation date, set for December 2009, but also increased to a $15,000 credit for all buyers, not just first-time home buyers. Their work may have resulted in, among other things, the Worker, Homeownership, and Business Assistance Act of 2009 enacted on November 6 that extended the tax credit at least for first-time home buyers until May 2011.
Other data suggests that prices may drop further before recovering, but there are still signs of hope. Les Christie, writing for CNNMoney.com on October 20, 2009, points out, “Overall, the national median home price is predicted to drop 11.3 percent by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6 percent.”
Are We Headed for Another Housing Collapse?
Some experts fear that lobbying efforts, such as those led by the National Association of Realtors to extend or expand the tax credit, may lead to another housing bubble. Jim Puzzanghera, writing in the Los Angeles Times on October 8, 2009, highlighted concerns that the FHA may be increasing the risk of another bubble by lending to riskier buyers and requiring lower down payments. Puzzanghera states that “the agency is also much more exposed to the volatile housing market. Experts worry that if home values start tumbling again, new FHA-insured mortgages would be underwater because of the low down payments.”
This concern is echoed in an editorial titled “Obama to Reinflate Housing Bubble” that appeared in the Washington Examiner on December 29, 2009, criticizing a decision President Obama announced on December 24, 2009, to remove the $400 billion cap on federal loan guarantees for Fannie Mae and Freddie Mac. The editorial argues “it was precisely such government guarantees that caused the housing bubble and economic collapse in the first place.”
Future of the Housing Market
Only time can really tell what is in store for the housing market, and the issue will continue to be debated and receive attention both from the government and the media. As more programs are defined in Washington, lenders make decisions on Wall Street, and homeowners grapple with mortgage concerns or try to navigate the various government programs, it is to be hoped that the nation learned from the mistakes of the past century.