By Douglas K. Smith, author of On Value and Values: Thinking Differently About We In An Age Of Me
The recent federal budget deal eliminated $88 million of HUD funding for non-profit housing counselors. According to this report, these groups use roughly half the funds for foreclosure counseling and half for homebuyer education and qualification. The report says a separate foreclosure counseling effort is also being reduced by $65 million.
Historically, non-profit housing groups focused on low-income folks. But, for many years, people with moderate incomes – nurses, police, teachers and others in what used to pass for the middle class – have also sought help. The core purpose of the non-profits is simple: help people achieve affordable home ownership. This entails educating them on the realities of ownership, helping them shift credit, consumption and savings behavior, advising on how to avoid the worst practices of real estate and mortgage brokers — even at times doing lending. All of which together means, in effect, doing the real work of underwriting that has long since been abandoned by the too big to fail banks who, in their eagerness to increase volumes and squeeze out costs through technology and ‘modeled’ strategies, eliminated the capacity for this careful work.
Most non-profit groups are quite good at what they do. Just under four years ago, I wrote this for Slate:
Here’s a snapshot of the quality of loans made by two kinds of lenders to aspiring homebuyers who are financially strapped: The record for the first kind of lender is that one out of every five or six borrowers are late on payments, and foreclosure rates are rising. For the second kind of lender, at the most one in 20 borrowers pay late, and foreclosure rates are holding steady.
Which group do you want lending your money or financing your home purchase? Obviously, the second kind. And yet if you picked them, you’d be running against the tide of American capitalism. The lenders with the strong record are America’s nonprofit housing enterprises. The lame numbers come from subprime lenders, who apparently never meet a homebuyer too risky to bet on. Over the last several years, investors have poured more than $1 trillion into subprime lending. By contrast, the housing nonprofits got, at best, a few billion.
Yet, Obama, Boehner and others have now taken resources away from these groups.
These cuts are cruel. They further jeopardize millions of families already overwhelmed by job losses, stagnant pay, diminished benefits, risk of medical bankruptcy, plummeting housing prices, ghost neighborhoods, and shrinking state and local services. Not to mention vulnerability to being duped by ongoing, complex “innovations” of fraudulent servicers and banksters obsessed with predatory fees, paper profits and taxpayer subsidized bonuses.
And, as if all that weren’t bad enough, along come not only these cuts but also bankster-wannabe, revolving door officials in Congress, the judiciary and the Obama administration who trip over themselves in a race to use consent decrees and settlements aimed at creating the illusion of putting all this unpleasantness behind them. This is not policy. It’s choreography. It’s about staging a grand ‘forward looking’ kumbaya, ‘grown up’ and ‘serious’ moment of doubling down on the status quo.
That makes this budgetary stab-in-the-back of middle and low-income folks – and those who seek to help them — just one more dreary illustration of the polar opposite treatment accorded those too small to save versus those too big to fail.
Cruelty aside, though, this is also mind-numbingly stupid. The real economy will not recover without a recovery of the housing sector. (Yes, it will take more than that, too). And, even the unreal economy we call the financial sector will not see a successful conclusion to extend and pretend back-door recapitalizations without a recovery in the housing sector.
Look, we all know that “Wall Street Won”. We know the banksters control both parties and are immune from any threats to their bonuses or their liberty. Still, even on the banksters’ own terms of extend-and-pretend, these cuts are idiotic. Even a housing recovery timed to avoid inconvenient write-downs while banks recapitalize slowly enough to ensure billions in bonuses must seek a clearing of the market through a blend of reduced supply and increased demand – as well as mortgage products that normal people can understand and afford. And, while it might come as shock to the oligarchy, the housing sector requires participation by more than the top 1%.
Yet here’s where we stand:
➢ More than 50 million homeowners have mortgages.
➢ Nearly 25% of them are under water (home value less than what’s owed).
➢ Nearly 7 million are either delinquent or in foreclosure already. At the current pace, it would take 2 ½ years just to clear current over supply of foreclosed homes.
➢ Home prices are projected to continue falling somewhere between an additional 20 to 30 percent – meaning even more will go under water.
➢ Official (essentially short term) unemployment remains stubbornly high, and long-term (permanent?) unemployment continues to rise to historic heights.
➢ Inflation in food, energy and other necessities is skyrocketing, putting even more pressure on households at or near the brink of mortgage default.
Do the math. The market has too much supply and too little demand. The trends point to even worse un-affordability down the road – meaning more supply and less demand. So, as said, even the empirically wrong-headed extend and pretend strategy requires efforts aimed at reversing instead of exacerbating this picture.
Among other things, reduced housing supply means, as Yves has repeatedly pointed out, doing principal modifications that are actually affordable – which, in turn, requires a new, separate underwriting effort. And, the same applies on the demand side: only careful underwriting leads to affordable, sustainable purchases – and the asset values that go with that.
The banks do not know how to do this work. Nor, as long as they seek usurious rents, will they ever learn.
But non-profit affordable housing groups do know how to do this work. They know how to prepare people to buy homes that will remain affordable. They know how to help people find affordable solutions to avoiding foreclosure and staying in homes. And, finally, the dedicated, professional foreclosure counselors know how to help people who cannot afford to stay accept that reality and find the most humane route out of their homes.
Efficiency, as we’ve come to learn, is not part of the efficient market hypothesis. Unsustainable and predatory returns grounded in ignoring the balance sheet not to mention tail and even non-tail risks – yes, those are part of the efficient market hypothesis. But efficiency itself? Not so much.
But the self-serving proponents of this false theory remain in control. So, instead of rational, efficient capital finding its way to high performing organizations who know how to prepare and underwrite home ownership that avoids a plague of delinquency and foreclosure, our purveyors of capital prefer the casino, come what may. As a result, high performing groups like the excellent non-profit housing counselors –groups with strong track records of low delinquency and foreclosure — depend on government funding and private charity. Yet, the grown ups in government now stupidly endanger many of these groups instead of providing even more support for their economy-saving efforts. It is an upside down world.
Apologists for the Obama and Congress often speak soberly about taking scalpels to budgets as part of shared sacrifice and tough decisions. In this as so many other cases, that is arrogant and ignorant nonsense. These decisions affecting less than one one-thousandth of one percent of the federal budget are not ‘tough’ – at least on those who make them. Which means there’s nothing shared by the decision makers in the sacrifices that will now get worse. Finally, these are most certainly not scalpels. They are stilettos in the backs of everyday Americans and the people of good performing organizations who serve them — who see and treat them as customers instead of income-and-asset targets to be strip-mined. But, then, the ill-got profits from strip mining are more likely than the meager, shrinking resources of everyday consumers to find their way into the political war chests of a post-Citizens United oligarchy.
The failed housing market is a symptom of the corruption and greed that is allowing to continue on Wall Street and DC. These are the richest, most powerful people in the world, and left to their own devices, will bring about the destruction of all. Who is anyone to stand up to them? Not satisfied with taking all of the world’s current wealth, future generations are being strip mined by continued deficit financed with US Treasuries. When that is gone, and we’re nearing that point, what happens is anyone’s guess.
There was a time I would have been interested to know which lobby penned this and which congresscritter slipped it in. But it makes no difference anymore There is seemingly no way to achieve representation from the inside of a tumor. it’s simply time to rid ourselves of them all and start anew.
Congress, the president, the courts and their sponsors are terrorists. Stop negotiating… the enemy is within, still on the take, doubling down with each passing day.
***But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security.***
“There is seemingly no way to achieve representation from the inside of a tumor.”
Revolting, but it made me chuckle. An ugly but accurate observation, I think.
Excellent post Doug!
Beyond principal reduction, we also have to look at monthly payment debt ratios, which at the moment in the FHA world, are just as insane as the subprime loans of last decade.
I’m troubled by seeing so many FHA first-time home buyer loan applications where the Front End(PITIMI)/ Back End (PITIMI+revolving debts) is consistently at a 41/52 ratio.
At these debt levels, if anything goes wrong (auto repair, large co-pay, braces for a child), these borrowers could easily miss a payment or two and get caught in the servicer hamster wheel and never get out.
At some point in the near future, we’ll see this issue to come to the surface for FHA, along with the 96.50% LTV.
The smartest move is to cap DTI at 30/36 on new mortgage issuance and for modifications. However, as you state, the banks and servicers are not geared up to make that happen, nor can they afford to since they’d have to bring on TARP 2.0, and we all know that’s not politically feasible at the moment.
As a Foreclosure Intervention Housing Counselor who voted for Mr. Obama, I would gladly welcome his $88 million contribution from his ONE BILLION dollar re-election campaign to fund our work. With the recovery of the housing crisis comes a better economy and positive election results for Mr Obama.
Bill Black in his piece said that the failure to prosecute Wall Street control fraud was incredibly stupid. Today Douglas Smith says it’s stupid to cut funds for housing counselors. I think they are both wrong. They proceed from the assumption that our leaders are acting in good faith but stupidly. This is false. We live in a kleptocracy. Our elties are acting in bad faith and knowingly.
Hugh, our our leaders are acting in perfectly good faith to the people they work for. Problem is, those people aren’t us. You don’t think elections actually mean a damned thing, do you?
Hugh (12:32) is right: just because the road to Hell is paved with good intentions is no reason to believe our lawmakers’ intentions were good. “Affordable housing” is another sound bite. The officers of Freddie and Fannie(which are “government sponsored”, but not non-profit) were paid bonuses proportionate to mortgage dollars issued, and no one can pretend to believe that people whose only question was “what is the monthly payment?” (the subprime borrower) would, when rates reset, be able to keep current with payment- but it did not matter a bit to them- the taxpayer, not they, was on the hook. There were Congressional hearing over this issue (Google Claude Rains), and it made no difference- the enormous flood of lobbying cash carried the day. The same is true of Obamacare
Congress has seen fit to limit commercial free speech in the public interest when it came to to cigarette or liquor advertising on TV. There is no reason why, using the same logic, they could not outlaw paid lobbying. The temple will surely crumble if Americans do not force the money-changers out of it.
Yikes. Every reply echoing fatalistic pessimism. Not to say that isn’t a valid point of view.
I’m trying to think back to grade school. What’s the best strategy when you are a captive of sadistic bullies who enjoy tormenting you?