Housing's horror show
When president Obama was elected four years ago, millions of Americans hoped he would end their housing nightmares. On the eve of a new election, Lydia Stockdale examines whether voters are sleeping more soundly
When Barack Obama became president of the United States in January 2009 the horror of his nation’s housing crisis was keeping everyone awake at night.
Three years before, the country’s huge housing bubble burst. Too many high interest loans had been given to too many households with low credit ratings, and confidence in the nation’s financial markets plummeted. The availability of credit tightened, both in the US and across Europe, kick-starting the economic nightmare we’re all still experiencing.
The scale of the challenge must already have been playing on president Obama’s mind as he lay down for his first night’s sleep in the White House. After all, who could sleep easy when 860,000 homeowners had seen their properties repossessed by their mortgage lenders during the previous 12 months and with 2.3 million Americans on the brink of foreclosure proceedings, with economists warning the worst was yet to come.
Source: The Red Dress
The American dream, which for so many citizens culminated in them being handed the keys to their very own home, had turned into a nightmare. But fast forward nearly four years, and you’d be forgiven for thinking that nightmare was over.
The US election takes place on 6 November, and throughout both the Democrat leader’s campaign to win another term and his Republican opponent Mitt Romney’s battle to defeat him, the subject of housing has been notable by its absence.
Last week the two presidential hopefuls went head-to-head for the first time in a televised debate focusing on domestic policy - foreclosures did not get a mention. In fact, the only time president Obama brought up the subject of housing was to say that prices had ‘begun to rise’.
What, though, is president Obama’s track record in dealing with the housing crisis that confronted him when he took office? Have there been sustained improvements or, like the best horror films, is there still a sting in the tail?
Mr Obama is right about house prices, but only just. According to rating agency Standard & Poor’s Case-Shiller index, when he took over from Republican George Bush, house sale prices had fallen by 29 per cent since April 2006. They continued to fall by a further 7.5 per cent to January this year, when a turnaround began, leading to a 3.6 per cent rise during the six months to June.
There is still a long way to go until the American dream is restored and there is still plenty of room for criticism. Foreclosure starts are down to 99,000 a month from a high of more than 200,000 in April/May 2009. But rates remain stubbornly high in many parts of the US, including in key election swing states like Ohio - this would have been an easy point for Mr Romney to pick up on during the debate, but he chose not to.
In the run-up to polling day, both president Obama and Mr Romney appear to be pretending the housing nightmare has gone away. And they have good reasons for doing so.
‘The Obama administration has been pretty timid when it comes to dealing with the housing issue,’ sums up Richard Green, a public policy professor at the University of Southern California. ‘If you look at how it responded when they took office - and this is also true of the Bush administration - it was really about saving the banks.’
However, Mr Romney’s response to the housing crisis isn’t exactly something he wants to remind voters about, according to Professor Green. ‘He basically said, “Oh just let everybody get kicked out of their houses, let’s foreclose on it and be done with it”,’ he recalls.
Housing policy has been swallowed up into fiscal policy - it’s an inextricable part of the wider economic crisis, and that’s something both candidates are carefully avoiding speaking about in great detail.
‘They’re not really talking about the economy as they are scared of talking about [the US government’s] deficit going up,’ explains Robert Van Order, professor of finance and real estate at George Washington University. Instead they’re focusing on more marginal arguments, ‘like the rights and wrongs of more taxation on the rich’, he adds.
It’s looking unlikely that Mr Romney will publicly scrutinise the Obama administration’s housing record, so Inside Housing asked US housing experts to review the president’s performance.
The Obama administration got off to a slow start helping to exorcise the problems of struggling homeowners, says the University of Southern California’s Professor Green. Its first attempt, the home affordable modification programme, was too ‘complicated and bureaucratic’, he states.
The scheme enabled homeowners to avoid foreclosure by reducing monthly mortgage payments so they accounted for no more than 31 per cent of a household’s gross income. But the Department of Housing and Urban Development ‘did such a bad job of forcing the lenders to buy in to it that it has helped a very small fraction of the people it was intended to’, Professor Green states. According to the US Treasury, more than 1 million homeowners have received a permanent modification through the programme, saving an estimated $15 billion on their mortgage payments.
Another initiative, the home affordable refinance programme, allows homeowners to refinance even though the value of their homes has declined, and it has fared much better, says Professor Green. ‘But all it is doing is allowing people to exercise an option that they’ve always been able to exercise, except when the housing market has crashed all around them.’
More than 1.5 million homeowners have applied to the scheme since its inception in 2009, with a 90 per cent increase nationwide since the programme was updated last November.
All in all though, during his first term as president, Mr Obama’s primary housing focus has been on shoring up the private for-sale housing market, says Rick Gentry, president and chief executive of the San Diego Housing Commission. House values in the US are still down from their peaks in 2006 and 2007 by about 35 and 40 per cent, he adds. ‘In some areas, such as South Florida, Arizona, Nevada and parts of California values are down well over 50 per cent. [But without the] intervention and focus of this administration - particularly the troubled asset relief programme, the so-called ‘bank bailout’ - the entire market could have collapsed.’
This has come at a cost to affordable housing and community development. ‘A lot of political capital has gone into that effort to maintain homeownership at the expense of maintaining their core programmes,’ says Saul Ramirez, chief executive of the National Association of Housing and Redevelopment Officials.
Some of America’s most vulnerable citizens have fared well under the Obama administration. Shortly after he was elected, the president put together the first national programme, called the homelessness prevention and rapid rehousing programme, designed to prevent homelessness and to rapidly rehouse people who became homeless. Under the programme, community-based organisations were funded to help people who were imminently homeless - those who had received an eviction notice and would face being homeless in the next 14 days.
‘[As a result] we’ve not seen the increases in homelessness during the recession that we might have expected. In fact, we’ve seen some significant decreases,’ says Dennis Culhane, a professor of social policy at the University of Pennsylvania and a White House Advisor on Homelessness.
There was a 1.2 per cent rise in the number of homeless families across the US between 2010 and 2011 when 76,446 were counted. More recent figures showing homeless numbers are not being published until after the election, but Mr Culhane expects they will show that family homelessness decreased in 2011, largely due to the HPRP.
The three-year, $1.5 billion (£900 million) programme unfortunately came to an end earlier this year. ‘It was the first time our federal government actually paid people to solve the homeless problem for people who are experiencing short-term homelessness. It changed a lot of minds and hearts out there that this was something that was a valuable contribution to our field,’ adds Mr Culhane.
Over the past two years, the budget for tackling homelessness has been flat (see graph: Homelessness budget). ‘In order to develop new units, new funding is required, because the existing funding is always tied up maintaining projects,’ says Mr Culhane, who is also director of research for the National Center On Homelessness Among Veterans, set up by the Obama administration to invest $1.2 billion (£750 million) a year into housing specifically for ex-service men and women. Helping homeless veterans is one area in which the Obama administration has dramatically increased funding.
Douglas Rice, a senior policy analyst at the Center on Budget and Policy Priorities, a research and policy institute which focuses on the impact of federal housing policy on low-income families, says there are 40 million households across the US who rent, making up a third of the housing market.
The number who receive assistance through the country’s three rental assistance programmes totals 4.5 million - around one in four eligible households. The first of these programmes is project-based section 8 (which refers to section 8 of the US Housing Act 1937). It costs $9.3 billion (£5.8 billion) to run and helps around 1.2 million households. The rental assistance is attached to a privately owned property.
The second is tenant-based section 8, which is often referred to as ‘the voucher programme’, through which 2.1 million tenants receive vouchers they can use to rent any unit available on the private market. It costs $18.3 billion (£11.4 billion) a year with HUD paying the subsidy to private landlords via local housing authorities.
The third is public housing, which is owned by local housing authorities. It costs around $6 billion (£3.7 billion) a year and is home to almost 1.2 million Americans.
Each of these programmes relies on funding provided by the US Congress every year. Since 2010, the Congress has been divided with Republicans controlling the House and Democrats the Senate. ‘They have very different views of priorities on spending and taxation and the budget deficit generally - the net outcome of the political fighting over priorities has been very deep cuts primarily to non-defence discretionary programmes,’ says Mr Rice.
‘While funding for assistance payments to landlords has been largely sustained, funding for the administrative costs of housing agencies has been slashed pretty hard,’ he adds.
Funding for the administration of tenant-based assistance, which amounted to $1.58 billion (£1 billion), was cut by 8 per cent in 2011 and by another 7 per cent in 2012 to $1.35 billion (£800 million). In 2012, funding for operating and maintaining public housing was cut by $655 million (£409 million) to $3.96 billion (£2.5 billion), with the expectation that agencies would draw down reserves to make up the difference.
While funding has been cut, the number of rules and regulations placed on housing authorities has been restrictive, says Betsey Martens, president of NAHRO and executive director of Boulder Housing Partners in Colorado. ‘We feel up the creek without a paddle.’
In 2010, HUD estimated that the 1.2 million public housing units in the US needed nearly $26 billion (£16.3 billion) of investment. The Obama administration developed a proposal, called the rental assistance demonstration, to help preserve public housing. It aims to make it easier for housing authorities to access private capital investment in their properties.
‘It does this by offering them a different kind of funding contract that can be used for underwriting purposes,’ explains Mr Rice. The ability of housing authorities to mortgage public housing properties is currently very limited - this new contract type will make it more flexible and attractive to lenders, he explains.
However, Hope 6, a funding programme that, since 1992, has been set aside specifically for housing authorities to revitalise the worst public housing projects by transforming them into mixed-income developments has, under Obama, been opened up to a range of organisations and only two thirds of the funding is guaranteed for investment in public housing.
‘Public housing now has to compete with private entities and other not-for-profit entities,’ states Mr Ramirez.
Although ‘social housers’ are generally disappointed with the Obama administration’s performance, most hope he will win another term, explains Mr Gentry. ‘Prospects regarding the other party’s nominees in our November elections are frightening,’ he says. ‘Mr Romney, in an unguarded moment, indicated that he may propose giving all of the social housing programmes to the states, that is, if he is elected.’ This would mean no more federally funded low-income housing.
‘If Romney is elected and the Congress is controlled by the Republicans I think we could see defining, seminal, generational changes over the subsequent one-to-two-year time period,’ adds Mr Gentry.
The swing state
‘As Ohio goes there goes the nation,’ so the saying goes. ‘But it doesn’t feel like anyone is listening to us,’ says Paul Bellamy, director of development and research at Empowering and Strengthening Ohio’s People, which helps homeowners facing foreclosure.
He says that instead of acknowledging that property value has disappeared, both political parties are stuck on the moral arguments about ‘deserving and undeserving homeowners’ - those who are and aren’t to blame for taking out mortgages they can’t afford.
‘Both the Obama and Romney camps clearly don’t want to talk about this embarrassing trillion dollars of debt that’s out there [in ‘underwater mortgages’],’ says Mr Bellamy.
Banks have not had to recognise that the values of homes have fallen, he states. ‘They have been given permission to essentially avoid the accounting inconvenience and keep the loans on their books until they absolutely have to recognise the loss, so they’re in a sense motivated to put off the foreclosure and extend the mystery.’
‘It’s a discouraging point to be at in this country, to see the suffering that’s going on and how little meaningful talk is going on about it.’
Meanwhile, unless the presidential candidates wake up to the housing crisis, the nightmare will continue for millions of ordinary Americans who are struggling to find an affordable place to live.
The opposition’s view - Anthony Sanders
If elected, Mitt Romney would restore certainty in the housing market
One of the biggest problems facing the nation’s housing market is that of uncertainty. The Obama administration has chosen a housing policy of seeming endless interference (13 loan modification programmes with constantly changing rules). These modifications redistribute wealth from investors and taxpayers to borrowers.
The administration is heavy-handed with regulations that choke economic growth. It also has a preference for ‘green’ urban development in the form of multifamily housing (apartment buildings) and seems hostile to traditional suburban development.
President Obama’s plans are reminiscent of president Clinton’s overly ambitious housing goals (the national homeownership strategy), which resulted in lower down payments and relaxed credit for households that had not owned a home previously - and almost destroyed our housing and financial markets, we don’t want to travel that path again.
I would characterise governor Romney’s housing policy in this way: removing the uncertainties rather than increasing uncertainties. His overarching theme is to get the economy moving again and all else follows. He seems genuinely interested in government sponsored enterprise reform and reducing the government’s footprint in housing finance from more than 90 per cent to something less (50 per cent or lower).
Like many Republicans, governor Romney wants to reduce the regulatory burdens and institute true regulatory reform.
On the foreclosure front, both governor Romney and the Obama administration advocate selling government-held real estate owned (usually bank-owned) properties to benefit local communities.
In addition, both want to explore alternatives to current foreclosure. The key difference is that president Obama relies on government ‘trickle down’ while governor Romney advocates the free market solution.
In a nutshell, the Obama administration has relied on massive regulation (much of which has not been written) and constant interference in the private sector.
Governor Romney’s camp is advocating faster economic growth and less regulation and interference. In other words, it is a choice between liberty and leviathan for the economy and housing markets.
Anthony Sanders is a professor of finance at George Mason University in Virginia