48% Underwater

This must have happened while I went on vacation:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Ho. Lee. Crap.

Being underwater not only affects being able to keep the home, but it profoundly affects individual mobility. You become chained to your home, waiting for it to increase in value, even if there are no jobs in your area or you get an attractive offer elsewhere. That's just one element of how foreclosures and underwater homes impact the economy.

How in the world can we fix this? So far the foreclosure mitigation options offered by the White House have been inadequate. Though sales are creeping back, if a second foreclosure wave strikes the market could remain unsettled for some time. The Obama Administration is moving toward encouraging affordable rental units, which I think is a good sign.

The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.

The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.

Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home.

That deals with a future problem of ensuring that the only people with mortgages are the ones who can pay for them, however. It does little for those underwater in their home or facing foreclosure right now. For that group, I think we need to seriously look at right to rent, converting homes that would otherwise be foreclosed into rental properties for the families for a set period of time. This would solidify neighborhoods, give banks a revenue stream instead of having a foreclosed home sit on the market (although they're probably making more from foreclosure in the short term, as it stands right now), and help people stay connected to their communities. Dean Baker writes:

It's time to try a new route for helping homeowners. There is a simple alternative: Congress can pass legislation that gives homeowners facing foreclosure the right to stay in their home as renters. This "right to rent" policy would require no taxpayer money, no new bureaucracy and could immediately benefit homeowners facing foreclosure.

The basic idea is simple. In recognition of the extraordinary crisis, Congress would give families that took out mortgages at the peak of the boom and are facing foreclosure the option to remain in their homes as renters for a substantial period of time -- five to 10 years -- while paying the market-rate rent. Earlier this year, Freddie Mac launched a similar policy, giving former homeowners the option to lease their recently foreclosed properties, but on a month-to-month basis. That was a positive step, but it does not give families the housing security they need....

Although they would lose ownership of their homes under "right to rent," the residents would be able to stay in their homes, neighborhoods and schools. This would provide families facing foreclosure with needed stability and housing security.

This would also help with loan modification, as banks would have a choice to change terms or accept rent. Much like cram-down, it would put the playing field level again, instead of hopelessly tilted in favor of the banks.

We need to do something with the first principle that reducing foreclosures is the goal, not satisfying the banks. Cram-down probably makes more sense, but I appreciate the thought behind right-to-rent.

...slightly related, this WSJ editorial criticizing Vermont for having too many well-informed consumers and industry regulations, leading to "pitfalls" like fewer foreclosures and healthier banks, is worth reading if you want a hoot. If only we in California had the pitfalls of Vermont!

CA-10: An Interview With Anthony Woods

The race in CA-10 for the seat vacated by Ellen Tauscher features three lawmakers with long resumes at the state level. And then there's Anthony Woods, a young man with no prior history in elected office, but festooned with what Benjy Sarlin of The Daily Beast called the best political resume ever. Woods is an African-American product of a single mother who found his way to West Point and Harvard's Kennedy School of Government. He is a two-time Iraq war platoon leader who returned all of his men home safely and received the Bronze Star. He is someone who, after returning home, was dismissed from the Army for challenging its Don't Ask Don't Tell policy. But politicians don't vote with their resumes. They must have the conviction to vote with their principles. I actually conducted the first interview with Woods back in April, and since then others have taken notice. So I thought I'd return to Woods and ask him about some of the key issues facing the Congress in the coming months. A paraphrased transcript of the conversation, executed last Wednesday, is below.

DD: Thanks for talking to me today.

Anthony Woods: No problem, thank you.

DD: So how's it going on the campaign trail?

AW: You know, it's really exciting. We're reaching that point where we're really building some critical mass. As you know, I did pretty well in the last fundraising quarter, we're going to have enough money to compete with some experienced lawmakers. The Human Rights Campaign and the LGBT Victory Fund just endorsed me, which is very exciting and shows their commitment to this campaign. We just had a great grand opening of our office with 50 volunteers from across the area. I'm holding a town hall meeting in Fairfield (this already happened -ed.) coming up and we're really starting to see a path for this to happen. It's great.

DD: OK, well let's start with the biggest issue on everyone's minds right now and that's health care. The way it's looking, if you're elected you might get a vote on this. What are your principles for this debate, and how would you like it to go.

AW: Well, I've been getting more concerned every day. At first, I was thinking that Congress gets it. They're going to do something to deal with the health care crisis in this country that I see talking to folks every day. But as we get into it, they're moving further and further away. First of all, they should have started the conversation at single payer so that if they had to move to the center they would have been coming from a better place. What we have are two issues: access and cost. Clearly the system right now is broken on both fronts. 50 million people go without health insurance and the costs are skyrocketing. And the Congressional effort looks to be falling short. I'm very concerned that there may be no public option.

DD: OK, so will you take a stand right now and say that if the bill before you has no public option that's available the day it's introduced, you won't vote for it?

AW: I don't know if I'd exactly go that far, but here's what I would say. I think there has to be a public option that's efficient and effective. And if the Democrats have some bold leadership, they can do it and do it right. What we need is some competition in the individual marketplace. If people have to buy insurance, we have to give them a choice that's affordable. So that's my first priority. And if the bill before me doesn't have that, yeah, I'd have trouble voting for it.

DD: You say it's about bold leadership, OK. Right now, about 90% of all private insurers offer abortion coverage as part of their health care plans. If a public option is supposed to compete with the private insurance market, doesn't it have to offer the same kind of baseline coverage that private insurers offer, especially if they are legal medical services?

AW: I think so. I am pro-choice, and I don't believe in limiting the right to choose. And if you're giving someone health insurance who has had trouble affording it, if they have to make the difficult choice to get an abortion, they need the same kind of resources that you could get on the private market. So I would agree with that.

DD: OK. I want to talk about the F-22. As you know, the Senate just voted down funding for additional funding for F-22 fighters that were designed for the Cold War and have never been used in Iraq or Afghanistan and are apparently vulnerable to rain. What's your reaction to that, and then I want to get into the military budget more generally.

AW: I support stripping the funding. My view is that if the Secretary of Defense and the Chairman of the Joint Chiefs of Staff and the President all say we don't need them, we probably don't. And regardless of the impact on jobs, we should listen to that. I think we need in procurement a short-term view and a long-term view. We should obviously be prepared to defend the country, but we should be prudent with those funds, because it is real money.

DD: The F-22 funding and some other funding may stop, but the military budget will increase this year. And we still spend more on military activities than any other country on Earth combined. How can we continue to do that, isn't it unsustainable?

AW: My deployments in Iraq taught me that the military cannot be the solution to all of our problems overseas. Because we have this mindset currently, we've created a situation where the military is providing resources that other agencies could provide. We shouldn't have the Defense Department doing the work of the State Department or NGOs or US AID. I think if we shift some of that burden, it will actually make the troops safer, because we can focus resources on protecting them and providing them the equipment they need, instead of making the military the sole solution to every problem overseas.

DD: I want to tell you about a story I saw in the Wall Street Journal. It showed that the top 1% of wage earners in this country, the executives, the wealthy, are now earning 35% of all compensation. How do you react to that?

AW: Wow. That says a lot. You know, these are tough times, and when you see a tiny fraction like that benefiting from the resources of this county, I think it says that they need to sacrifice. We're in a situation where we implemented tax cuts in the middle of a war. We're trying to figure out how to pay for health care. And the top 1%, they're doing pretty well. I think we need some shared sacrifice.

DD: Why do you think it's so difficult for Democrats to simply say what you just said in that way? Even the surtax they've come up with in the House to pay for health care is getting dismissed. Why can't we just make the case that America is worth paying for, especially for those who use the public commons so much?

AW: I really think it starts with people who are willing to say that. And it's why I want to be there representing this community in Washington. My opponents are mostly the same politicians who we keep sending to Washington again and again, and I think we need someone who isn't afraid to say that, you know, the country has provided a lot to a small group of people, and they should give a little bit back.

DD: OK, let's move on. The foreclosure crisis is still hitting California hard, and so far the solutions that have come from Congress hasn't worked. What are some of your ideas to keep people in their homes?

AW: This is something I hear about from people every day when I'm campaigning. In California, we had a moratorium on foreclosures for a while, and I think that's part of the equation, but if you don't provide loan modifications for people, eventually that's not going to be enough. The immediate crisis we have is that people are losing their homes, so we need to make the necessary adjustments to allow people to refinance. After that immediate crisis, I think we have to clean up the regulatory environment, both in the mortgage market and also in banking.

DD: I've heard an interesting proposal called "right-to-rent," where people facing foreclosure can pay rent on the home for a number of years, they get to stay where they are, the banks have a revenue stream and don't have to deal with a blighted property, and the community gains from not having foreclosed properties on their block. What do you think of that?

AW: Sounds good. A lot of people are suffering right now. And it's traumatic to uproot yourself and have to leave your community, to have your kids leave schools. So anything that keeps folks in homes and communities sounds like a smart idea to me. It's certainly better than what we're doing.

DD: But how do we institute something like that when the banks, in the words of Dick Durbin, "own the place"?

AW: That's a tough problem. You know, the healthiest banks right now are the ones who separated investment and lending. And I think that most people I meet are frustrated to see the banks get us to this point. They want common-sense regulatory solutions to change that environment. I think the banks will have a real problem on their hands if they keep pushing and pushing, and people don't see a change in their daily lives while the banks rake in tons of money.

DD: OK, but what's the theory of change? How do we get all this done? When you have a situation where special interests rule and campaign contribution money means more than constituents, how can we fight for progressive outcomes in a Congress that appears to care more about the next election?

AW: Well, I think we have to elect people who are accountable to the ones who sent them. For me, I will give as much access to everyday people as possible, and let them shape my agenda rather than special interests and lobbyists. And I think we need to elect more people who have this philosophy. We're going to have to do it one representative at a time. And I think that's one of the reasons why my campaign is taking off. We cannot expect different results with the same politicians dealing with the same problems year after year. So I don't know if we can deal with everything at once, but we'll have to do it one representative at a time.

DD: OK, last question. Obviously, here in California, we're looking at a terrible budget and lots of structural problems. What can be done at the federal level to perhaps help the state out of this mess?

AW: Well, just looking at the state budget deal, it's basically more of the same. There's a crisis of leadership in Sacramento, and it produced a budget full of accounting tricks that just kick the can down the road. It's clear that the system is broken, and that's why I'd prefer a Constitutional convention and at the least getting rid of the 2/3 rule for budgets. California is such an important economy, it's a big chunk of the country, and when we aren't doing well, the country suffers. At the federal level, I think we need smart investment. The state is a donor state, it doesn't get back in funds what it pays in taxes. So I'd like to help reduce that. And also, we can take advantage of the resources and opportunities in California. This state has the chance to be a new energy leader, through wind and solar. And so I'd like to see those kinds of smart investments in California.

DD: Do you support a second stimulus, focused on state fiscal stabilization funds to save those jobs that rely on state spending?

AW: I think we're having a hard time distributing the funds from the first stimulus. So I think we have to give it some time to work. But we are definitely at a crisis point in this state, I see it every day, so I think we need to monitor the situation. And we have to make sure there's a safety net in place for the people of California.

DD: OK, great, thanks for taking the time to talk to me.

AW: Thank you.

Primarying The Federal Reserve

Much in the way that lawmakers can get pulled from the center to the left when primaried by a member of their own party, the Federal Reserve, facing the prospect of a Consumer Financial Protection Agency that would take away some of its power, is shifting to a more consumer-friendly position on lending practices, including getting rid of the dreaded yield spread premiums that incentivize lenders to screw their customers.

The Federal Reserve on Thursday unveiled a proposal to curb abusive lending practices by reining in compensation for mortgage brokers and by helping borrowers better understand the terms of loans available to them.

The plan, which builds on a similar effort adopted by the Fed last year, comes just as the central bank is trying to fend off a legislative initiative that would strip its consumer-protection role by creating an agency to oversee consumer financial products.

"It certainly doesn't hurt the Fed that they came out with mortgage lending rules that were tougher than most of the industry was expecting," said Jaret Seiberg, a policy analyst at Washington Research Group, a unit of Concept Capital.

The toughest part of the Fed's plan deals with compensation for mortgage brokers, who act as middlemen between borrowers and lenders. These brokers can be rewarded with extra fees for placing borrowers in higher-rate loans.

The proposal attempts to end this practice by barring lenders from offering extra compensation based on the terms of the loan, including the rate. Consumer advocates have long argued that incentive-based pay contributed to the subprime mortgage meltdown.

"This plan has got the potential to eliminate one of the worst practices in the mortgage market," said Michael Calhoun, president of the Center for Responsible Lending. "The devil will be in the details. Some of the worst actors in the industry have proven to be adept at exploiting weaknesses in rules. The final rule has to be tightly and carefully written."

However these things get into law is fine with me. Whether the threat of the CFPA entices the Federal Reserve to do its job, or whether a CFPA gets enacted and does it itself, ending the practice of paying off mortgage brokers for screwing their customers is a good thing.

Of course, these are forward-looking proposals. And however solid they may be, they do not deal with the current problem of people struggling to stay in their homes and stave off foreclosures, which is only growing. The current mortgage relief efforts are simply not working. I'm glad that Sheldon Whitehouse is signaling another look at cram-down, the idea of allowing bankruptcy judges to modify loan terms with the broker. You have to give the borrower some opportunity to dictate terms, or as we have seen the bank will not modify the loans.

But there is another option, and that's own to rent. Dean Baker has pushed this proposal prominently, and it's starting to get support on Capitol Hill.

There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in their home for a substantial period of time (e.g. seven to 10 years) as renters paying the market rent.

The lender would take ownership of the house and would be free to resell it, but the lease would carry over for the duration of the period designated by Congress, or until the former homeowner decided to move. In this period, normal landlord-tenant laws would apply, with the exception that the lender would not have the option to evict the former homeowner without due cause.

This rule change would provide homeowners with a large degree of housing security. If they like their current home, their neighborhood, their kids' schools, they would have the option to remain there for a substantial period of time. Furthermore, by making foreclosure a less attractive option for lenders, a right to rent law should give lenders much more incentive to pursue mortgage modifications as an alternative to foreclosure.

This change should also be beneficial for neighborhoods that are plagued by large numbers of foreclosures. Keeping former homeowners in their homes will keep homes occupied, preventing the blight that often comes from vacant homes that are not maintained.

The banks will fight this, but the overall housing market will likely rise from diminishing the glut of supply. The banks would get off the hook for a lot of the upkeep of blighted properties, the cycle of foreclosures could get stopped, and they would obtain consistent revenue streams in the form of rental payments, while still holding the potential equity of selling the home. I really, really like this idea.

...of course, the Fed's nods toward consumer protection won't be enough for people like William Greider, who think it ought to be dismantled. I think it's hard to argue with Greider, considering he knows as much about the Fed as any human being alive.

Own To Rent

I really hope this goes through:

NEW YORK, July 14 (Reuters) - U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration's thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Dean Baker has been hawking own to rent policy since at least last year as a way to keep people in their homes.

This bill would immediately give families security in their home, so that if they like the home, the neighborhood, the school for their kids, they would have the option to stay in the house for a substantial period of time. This also has the great benefit for the neighborhood in that homes will remain occupied.

Perhaps more importantly, this change in foreclosure rules will give banks a real incentive to negotiate conditions under which homeowners can stay in their homes as owners. Banks do not want to become landlords. The bank will own the house after a foreclosure, but a house with a renter is worth much less to them than a house over which it has complete control.

Giving the homeowner the right to stay as a renter hugely increases their bargaining power with the bank. The result of this change in foreclosure rules is that far more homeowners are likely to remain in their homes as owners.

Seeking Alpha criticizes the proposal because of the implementation, when as Baker explains the goal is to give those facing foreclosure a stick to put themselves on a level playing field with renters. The worst option in the housing process is a situation where people are thrown out of their homes and the property lies vacant. The banks can't deal well with that, the homeowners are out on the street, and the economy takes an average hit of $250,000. Banks don't manage the property when it's vacant, that's arguably worse than them having to manage a rental property. Laws governing the rental arrangements can be drafted and made to a uniform standard.

Some have said that this would freeze the housing market and that's an issue, but that would happen with a moratorium as well. Those so focused on "clearing the market" don't want to deal with millions of Americans on the street. Easing these homeowners facing foreclosure into a rental situation that is sustainable makes a great deal of sense, and maybe we can clear out those homes over a number of years.