What we Know about Housing from President Obama's First Term
The President largely stayed in lockstep with the Fed on housing. The Federal Government has several key areas where they are involved in the housing market. Here are some of the most relevant, and what we saw from the first term, and what we might see in the second term..
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President Obama Worked with the Fed and Regulatory Agencies to Help People Refinance |
- Loan Programs for Underwater Homeowners President Obama pushed
several programs to allow homeowners to re-finance
- their homes - even if they no longer qualified under standard underwriting guidelines. Most people no longer qualified because declining home prices meant they no longer had enough equity to re-finance in the traditional sense, and the programs were meant to allow them to lower their debt ratios to assist in handling the economic downturn. Originally projected to assist 4 Million homeowners, it's generally acknowledged that only around 1 Million took advantage of the program. These programs were prominently featured early in Obama's administration, but there really hasn't been anything substantial in this area in some time. The housing market is on the upswing, so I expect new programs are probably done at this point, and we won't see any new ones. We may even see contraction here, as these programs get canceled.
- Stewardship of Fannie Mae and Freddy Mac There really hasn't been much about these two GSE (Gov't Sponsored Entities), but I suspect that we're going to be reading more about them in the coming term. President Obama, along with the Treasury and the Fed, were aggressive in making sure that lending continued in the wake of the financial crisis, at almost any cost. They didn't have a lot of choices, and I'm going to avoid making a value judgement here, but this was an expensive (to the taxpayer) option. These GSE's are still swamped in bad debt, and the loans that they have written are going to be great loans for homeowners - but bad for loan holders. Much has been written that private banks are not funding loans for homeowners, and the reason is simple - they can't make any money to compete with the rates on the government loans. They know that interest rates are going up, and they don't want the loans they are holding to be unprofitable, so they choose not to lend and the government has been forced to pick up the slack. Going forward, the GSE have already started tightening lending standards, in an effort to begin to reduce their risk and their exposure to these ultra-low loans. That should continue, but will raise rates as capital becomes less available, and the number of potential home buyers is reduced. As far as the systemic risk in the GSE's, how much additional risk/expense these entities will have on their books is beyond my expertise to calculate, and depends on the future interest rates which I can only guess at, but there is trouble here, make no mistake. I'd like to think that some systemic change (break them up into smaller entities, restructure them to be more crisis resilient add more checks to the system when housing gets overheated, etc). will be part of his second term, but it certainly wasn't mentioned in the campaign, and I think they will limp along as they are and be the next person's problem.
- President Obama's Influence on the Fed The Fed is designed to be relatively independent from the executive branch and congress, and for the most part it has been. Bernanke has certainly been handed a lot of issues and he managed not to wreck the country, and we have survived, if not by very much and not very well. Without Congress actually improving the business environment, he has done what he could, but, as with the GSE's, the piper will need to be paid at some point, and it remains to be seen how expensive that will be. The consensus is that Obama will replace Bernanke, but I find it unlikely that whoever is next could be any more housing friendly than Bernanke has been. On the optimistic side, an improving economy and struggling Europe could create a healthy economy that dramatically improves tax revenues - while keeping inflation in check - and helps ease the debt, eliminating pressure to raise interest rates to fund the deficit. This is the best case for housing. On the pessimistic side, rising inflation forces the Fed to raise interest rates before the economy gets going, which will both raise the deficit (as interest costs go up) and slow the economy. That will likely lead to pressure to either raise taxes, cut programs or (most likely) both, and there's already great pressure to do so. This type of environment will likely dampen the housing market for years - perhaps longer - as it becomes more difficult for people to pay off the debt they have, and reduces their incentive to move. Worse than 2009? I doubt it - but it won't be remembered as an engine of the economy either.
- Simpson /Bowles Deficit Reduction The Simpson/Bowles plan includes a provision to
eliminate the the mortgage interest deduction
- , which would raise taxes on anyone who sells their primary residence for a profit. I've written about it's impact at the link above, but it seems clear from Obama's first term that it's unlikely to get touched. President Obama basically threw water on the whole commission, and I think it's unlikely that he'll resurrect it now.
- Overall View of President Obama's second term on the Housing Market The President has embraced the Fed's goal of keeping a floor under housing, and with that market rebounding he will probably leave things as they are. It's clear that housing needed support to get through the crisis, but it is less clear that the money borrowed will be aggressively paid back if things improve, which could act as a drag on the market for years. No easy choices here for anyone, paying down debt is never fun, but I hope smarter folks than me are thinking about getting ready for the next crisis - so that the house of cards we currently have doesn't come down around our ears (again).
