By The Sacramento Bee, Calif.
Feb. 23--In the last decade, California's largely unregulated nonbank mortgage lenders and brokers pioneered exotic loans that divorced incomes from housing prices. Have a modest $50,000 income? Sure, you can own a $500,000 home.
This Gold Rush mentality allowed home prices from the late 1990s to rise out of proportion to actual incomes.
Now the illusion has been exposed, and housing prices that peaked in 2006 have fallen to 2001 levels. But they haven't yet returned to pre-bubble 1998 prices. Mark Zandi of Moody's Economy.com expects home prices to bottom out by the third quarter of this year.
Prices today are close to returning to levels in line with income. The trick now is to avoid an overcorrection. The circumstances make President Bar-ack Obama's narrowly crafted Homeowner Affordability and Stability Plan timely.
Some worry that the president's plan is a bailout of irresponsible borrowers and lenders. It isn't. This package will not help speculators who gambled on home prices rising indefinitely. It will not help lenders who pushed mortgages structured to fail. It will not reward people who bought homes they knew they could not afford.
But it does address the problem of unnecessary foreclosures that, as Federal Deposit Insurance Chairwoman Sheila Bair observes, are putting "artificial downward pressure on home prices, which is hurting everybody." Just look around. Vacant homes, repo signs, vandalism and crime are hurting everybody in our neighborhoods.
The way to end this is to make sure that loan modifications and refinancing are available to responsible buyers. Unfortunately, that's not occuring often enough. Government needs to remove barriers; Obama's package does that.
One barrier affects those of you who have conventional mortgages and faithfully make payments but who have plummeting home values. If your mortgage now, through no fault of your own, is more than 80 percent of the current value of your home, it is nearly impossible to refinance your home to get a lower interest rate or lower monthly payment. Obama removes this restriction on the government-sponsored entities Fannie Mae and Freddie Mac, which own 4 million to 5 million of the nation's mortgages.
Another barrier affects those with exotic loans at risk of getting behind in house payments. In many cases, these loans have been sold to investors, and the firms that now service the loans get paid more for foreclosure than for loan modifications. Obama would change the incentive structure, requiring any firm that receives assistance from the government to implement loan modification plans based on uniform guidelines.
As a carrot, Obama would use $75 million of already authorized funds to give these servicers a fee for each modification that meets affordability guidelines. They'd get more fees if the borrower stays current in payments. They'd also get a fee for modifying loans before the borrower falls behind. These elements should help tilt the playing field toward loan modification, helping 3 million to 4 million homeowners avoid foreclosure.
As a stick, Obama also is recommending that Congress lift the ban on loan modifications in bankruptcy court. Current law perversely allows bankruptcy judges to modify loans for investors who own two or three homes but not for people who live in their homes. Credit Suisse Fixed Income Research estimated in a Jan. 26 report that bankruptcy reform would provide about a 20 percent reduction in foreclosures, but would not "materially impact the pricing or availability of mortgage credit." It also would put pressure on loan servicers to increase voluntary loan modifications.
This package won't stop all foreclosures, nor should it. But it should stabilize the housing market. As Obama said, "All of us must learn to live within our means again."
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