Photo Credit: Shutterstock
March 7, 2013 |
If the Dow Jones Industral Average is hitting records
highs, how come the economy where most Americans live still sucks?
The answer is not just that many people
don't own stocks or that cash-rich businesses aren’t
hiring, or other oft-cited
trends
such as stagnant wages or stubborn jobless rates. It’s because a giant
slice of the housing market is still frozen, due to millions of
underwater mortgages, and that is
smothering local economies.
“Each house that is sold creates a number of jobs,” said
YouWalkAway.com founder Jon D. Maddux, whose company advises people facing foreclosure. “There is a huge drain on the economy because of this.”
How
serious is this economic undercurrent? It depends who you ask, but some
affordable housing experts say that it is so big—with 27.5 percent of
U.S. mortgage holders owing more than their house was worth as of
December—that it helped push the U.S. mobility rate to its
lowest level since the Census Bureau started tracking it decades ago. In other words, even though 792,000 people
moved last year because lenders foreclosed or were evicted, 13.8 million were
stranded with underwater mortgages as of December.
“The underwater homeowners is a serious drag on the economy,” said Brent White, a law
professor at University of Arizona and
author of
Underwater Home: What Should You Do If You Own More On Your Home Than It’s Worth.
“When there was a housing boom, there was a lot of spending because
homeowners had a lot of positive equity. They were spending because they
felt wealthy… now they feel poor. They think their house is not a good
investment anymore. There is a negative wealth effect because they feel
poor.”
With so many households and communities still held hostage
by debt, it is no wonder that news reports of Wall Street's recovery
land with a thud on Main Streets across America (see
map)
where the real estate collapse is still raw. And the prospects for
solving this nationwide economic crisis are very slim, because neither
the private sector nor government has anything underway that’s intended
to help most of these 13.8 million underwater households.
“They’re not offering that,” White said. “That’s the problem. It’s not there.”
Beyond Foreclosures: The Rest Of The Iceberg
The
housing bubble was at the heart of the meltdown that caused the Great
Recession. People bought homes with easy access to capital. Or they
borrowed against rising home values to finance their lifestyles. When
those loans could no longer be paid, the market crashed. But the debts
did not go away. The most visible part of that collapse was the
foreclosure crisis. Today, private investors are
buying
thousands of foreclosed homes, causing low-end home prices to rise. But
they haven’t risen enough to fix underwater mortgages—where the money
owed is more than current selling prices.
“The housing market is bifurcated,” said Paul Staley, who buys and sells low-end homes for a Bay Area affordable housing
non-profit.
“On one hand, what’s happening is prices are strong, but there’s a huge
portion of supply where people are not free to trade because they’re
still underwater. They’re trying for a loan modification. They want to
move, but can’t. Not yet. How do you work that out? This is thousands of
local households.”
“There is an artificiality in the housing
market now,” he explained, saying that prices are rising in part because
a significant supply of affordable homes—those with underwater
mortgages—are not available for sale. “Banks slowed down the foreclosure
process. But all these other homes are in limbo. The next big question
is how do you resolve the debt issues hanging over these homes?”
That
question does not have quick answers. Lenders do not want to take
losses, so they’re waiting for prices to rise. While there’s cheery
business press coverage
touting the marketplace for liberating a lucky few, the larger reality is that
millions
of people are stuck in homes they paid too much for—or borrowed too
much against—and are hesitant to spend, slowing local economies. In
2012, Zillow Real Estate Research
said
2 million borrowers recovered from underwater positions, but 13.8
million borrowers remain there. And those individuals are not spending
money for much besides bills and other necessities.
“I think of
the fear that people have,” Maddux said, when asked about underwater
loans and the falling mobility rate. “They are afraid to sell their
homes because they cannot buy another one. That is a very strong drain
on the mobility rate… You do have this very real problem with inventory
and problem with people unable to sell their homes.”
“If you have
an underwater home and you are unemployed and you get a job offer across
the country, you can’t take it,” said White. “If you’re underemployed
and you get an offer across your state, you can’t take it. That’s not
good for the economy. You want people to go where their talents can be
used effectively.”
“The people who are least able to afford these
kinds of things are locked in homes that are distant—far from where they
work,” said
MobilityLab.org’s
Tom Fairchild, whose organization encourages people to bike and walk to
work, not commute in cars. “They’re locked in this formula of drive
until you can qualify… They underestimate the costs. We see this all
over the country.”
Neither the private sector nor the government
is offering much help either, these experts said. Financial industry
lobbyists were successful in persuading Congress not to require them to
accept losses on underwater loans—and offer borrowers a new terms at a
lower rate, White said. Many of today’s underwater loans were written a
few years ago when interest rates were nearly double what they are
today. Because those homes are now worth less than their mortgages,
they’re stuck: no lender will work with them to refinance negative
equity, because a lender looks to the home’s value as its way to secure
potential losses.
Moreover, most of the government programs, such
as the recent multibillion-dollar settlement with the state attorneys
general, is designed for people who are facing the loss of their
home—foreclosure and eviction—which is not the same as having an
underwater mortgage. The underwater borrowers are mostly still paying,
quite profitably for the lenders. In some cases, banks accept what's
known as short sales, where a new buyer pays less than the loan. But
that is a lengthy process and not widespread.
“There has been some
refinancing,” White said, but not enough. “If you really wanted to
solve the problem, you might require banks to refinance, or have direct
lending from the government—refinancing at today’s interest rates… Japan
had a direct government refi program when its home prices crashed in
the 1990s.”
When asked if he saw anything on the horizon that
might break the underwater mortgage logjam, White said no, there was no
public or private sector initiative of that scale.
Sympathy For Banks, Not Borrowers
Some
of the reason is government policymakers and lenders are not very
sympathetic to people who are seen as borrowing and spending beyond
their means. That stance, when examined, is hypocritical, White said.
Businesses,
including lenders, are encouraged to write off bad debt and are
rewarded with higher market valuations, while individuals who write off
bad debt are penalized by lower credit scores and higher borrowing
costs. “We expect people to keep paying, but we expect business to shed
their toxic debt,” he said.
What this means is that regions of the country with the most underwater loans (see
map) are poised to have a drag on local economic recovery into the foreseeable future. And it is not because of the
oft-cited
factors associated with America’s growing gap between the haves and
have-nots, such as still-high unemployent, wage stagnation,
globalization and
reluctance in hiring trends.
It’s
because lenders—and the government—are not willing to stop a massive
transfer of wealth from 13.8 million still-underwater borrowers to banks
by lowering their interest rates, and in so doing allowing each of
those households to spend several hundred dollars a month elsewhere in
their communities.
Steven Rosenfeld covers
democracy issues for AlterNet and is the author of "Count My Vote: A
Citizen's Guide to Voting" (AlterNet Books, 2008).
No comments:
Post a Comment