Mortgages

Bank Regulator: Recovery Impossible Until We Solve the Housing Crisis

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A leading bank regulator spoke out last week about the sorry state of the housing market. And while she tried to make it sound upbeat, Federal Reserve Board Governor Elizabeth A. Duke’s assessment made two things clear:

  1. The situation is very bad.
  2. It’s not going to get better any time soon.

Among the problems? Only a small fraction of the people eligible for low mortgage payments through a government program have received any help. Lenders, not homeowners, own about 1 million homes. And about 50,000 of those lender-owned homes are basically worthless.

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Until we solve these problems, Duke said, the housing market and the rest of the economy will continue to struggle.

“Regardless of how we got here, we, as a nation, currently have a housing market that is so severely out of balance that it is hampering our economic recovery,” Duke said Thursday in her speech to the Federal Reserve Board Policy Forum.

So how would Duke fix these problems? First, she would tweak the federal government’s broken mortgage modification program to remove fees and conflicts of interest that currently prevent lenders and insurers from participating. Only 800,000 households have received lower mortgage payments from the Home Affordable Modification Program, 20% of the program’s original goal.

“One way to reduce the flow of foreclosed homes is to ease the payment strain on borrowers, which can be accomplished by modifying loans that are past due or by refinancing performing loans at lower rates,” she said.

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Next, Duke suggested more government help for converting single-family homes into rental properties. That might include a program that reduces conversion costs by aggregating multiple properties in a small geographic area and selling them as a unit to investors.

But what to do with all those properties valued at $20,000 or less, which are unlikely to be sold at a profit, whether the homes are converted to rentals or not? Duke suggested the government explore options to place properties into land banks so that local officials can decide which ones to rehab, sell or demolish.

In all of these cases, the goal is the same, Duke said: help investors, homeowners and neighborhoods stabilize their finances before looking for long-term solutions.

“Because it likely will take several years for the overhang of vacant homes to be sold,” she said, “such a strategy would help some communities deal with the short-term crisis and then ultimately allow for the disposition of properties in a manner suitable to local market conditions in the longer term.”

[Related: Medication for Middle-Class Mortgage Mania]

Image: Phil Scoville, via Flickr.com

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