housing jitters

What's up

The US's once rock-solid housing market starting seeing cracks in '06, but it wasn't until a spring '07 report on home-owner defaults (WP) and a couple of mortgage-related funds going belly up over the summer of '07 that Wall Street really started to feel the housing jitters. When Bear Stearns, a bigwig investment firm with lots of fingers in mortgage pies, practically disintegrated in March '08 there was no denying housing market woes were spilling over to the rest of the financial world.

Just how long the market will wobble along - and how much the housing crash will continue to slow down the rest of the (world) economy is unclear. What is clear is that a lot of low-income families will be losing their dream homes - and a few Wall Streeters will be deferring on that new yacht.

The administration and Congress have wrestled with a number of measures to to prop up the real estate market and families with faltering mortgages. A couple of small life-lines passed early in '08, but it wasn't until July that a major mortgage bail-out bill passed in Congress, HR 3221, extending government backed mortgages to up to 400,000 homeowners and unfurling a safety net for Fannie Mae and Freddie Mac that led to a full-blown take-over in September.

In the fall of '08, the administration started considering yet more aggressive measures to rescue about half of the families expected to go into default next year (about 1.5 out of 3 million), but no plans have been greenlighted.

Congress and the fed are also taking action to prop up - and tame - the rest of the market: see Wall Street woes and economy booster for more.

How'd this happen?

Everyone's pointing their fingers at the sub-prime mortgage market. Sub-prime loans - which go to families with shakier credit histories - became all the rage as the mortgage market figured out how they could spread the risk of these newer loans by chopping them up into parcels which they could then sell off to high risk investors (like hedge funds). See this Washington Post graphic for more on how the divvying works. The more mortgage lenders spread their risk, the more risky loans they could make - and so they did...

source: OFHEO (pdf) Note: "MBS" is a mortgage-backed security; "Prime" mortgages are regular mortgages given to good credit customers, "Alt A" mortgages don't require as much documentation as prime mortgages do (MSNBC).

The problem was - as with many new investment products - the market got a little excited and went out far on an untested ledge. As homeowners started defaulting, those high risk investors started pulling back - setting off a ripple of nerves that extended beyond the mortgage market.

What's keeping market watchers on edge is the fact that many high risk mortgages out there were given at "variable rates" - that is, they start off cheap, but then - after a year or so - higher mortgage payments kick in. Many of those mortgage rate hikes will happen in the next year - and it's questionable how many homeowners are prepared for the leap.

What to do?

Economists, lawmakers and advocates of are different minds.

While many fiscal conservatives and capitalist-minded lawmakers first advised letting the market correct itself, that notion took a beating in the fall of '08 when Congress okayed a $700 billion bail out bill for Wall Street. The going consensus is now the more the government can prop up the markets the better.

But the help that the Fed has extended to financial institutions has so far out-led the help home-owners are getting. That's not just about favoritism for Wall Street; the argument for helping out banks and other financial firms is that having free-flowing credit is critical to keep an economy humming - if companies can't get loans, job losses are just around the corner. Those arguing for more aggressive help for homeowners, however, say that until we stop the housing market from teetering, the rest of the economy will still be standing on thin ice.

Lawmakers have so far thrown a few lifelines to homeowners and the real estate biz - at the same time as regulating the mortgage market from getting too gung-ho in the future. The largest measure so far, HR 3221, gives hope for 400,000 homeowners, but that's a small fraction of the 2.7 million Americans that could lose their homes over the course of the current mortgage shakedown (WP). As of November, 2008, the Fed was also considering a larger plan to save up to 1.5 million additional mortgages - but it's unclear if it will go anywhere this year.

Expanding federal loans - and backing private ones: Congress' first line of defense was to loosen up existing federal loan programs. As part of an economic stimulus package passed in February '08, lawmakers eased up lending criteria for federally-backed mortgages under the Federal Housing Administration, by lowering fees for high-risk buyers and bringing down down-payments to zero.

Also as part of the stimulus bill, Congress let Fannie Mae and Freddie Mac, two quasi-governmental agencies that back mortgages, expand their portfolios to cover more homes. Regulators also went ahead and let the major lenders keep smaller cash reserves so they could back still more mortgages (WP & NYT). But after Fannie and Freddie's near collapse in July '08, the pressure was on to both buffer those reserves and to bolster their regulatory oversight. Both happened as part of a mongo housing bill passed in July '08. (Fannie and Freddie later became full-fledged wards of the state.)

That mongo mortgage rescue bill, HR 3221, had been in the works since early '08. The House passed a version in May that would back up to $300 billion in mortgages for families in subprime and alt-A loans that are slipping into foreclosure (WP). Refinancing would be a voluntary, with lenders agreeing to refinance the mortgage while resetting how much they're owed (syncing up with the new - lower - values of most homes). Because it's voluntary, the Congressional Budget Office (ie. hardcore accountants) think only about 500,000 of the predicted 2.8 billion homes that'll go into foreclosure procedings in the next four years will actually sign on. (WP & CBO) About a third of that 500,000 will end up foreclosing on their new mortgages, ultimately costing the federal government $1.7 billion. (CBO & WP)

The Senate passed a similar bill - albeit with a smaller reach - in July. The Senate bill would also cover up to $300 billion in loans for homeowners in the lurch - but because it uses criteria different from the House bill, only about 400,000 families are likely to benefit. (WP & NYT)

The final bill, passed in July, hopes - like the Senate bill - to help 400,000 homeowners. (WP) The program to refinance mortgages started up on October 1, 2009 (NYT).

What's in HR 3221

The massive mortgage rescue bill passed in July includes:

  • backing for up to $300 billion in refinanced mortgages for 400,000 homeowners to avoid defaulting on their high-risk mortgages,
  • tax breaks for new homeowners and for the real estate biz
  • about $4 billion for communities to turn around foreclosed homes
  • new, stricter oversight from the feds for Fannie and Freddie
  • a new line of potential credit for Fannie and Freddie from the Fed (with no clear limit), along with the okay for the fed to invest directly into the two mortgage-backers

The Fed started openly discussing a farther-reaching program in the fall of '08 - that would carrot and stick private lenders into reworking the mortgages of 2.2 million distressed home-owners (1.5 million of which would probably end up not defaulting). The plan mirrors programs the government is running with Fannie, Freddie and Indy-Mac, mortgage backers that have been recently absorbed by the government. The idea is to rewrite risky mortgages - by lowering the interest rates, extending the years of the mortgage or bringing down the principal of the mortgage - to a level that homeowners can handle. Although private lenders would voluntarily participate in a the mortgage-fix program, they might bite because the Fed would agree to cover half of their losses on any defaulting new loans. The plan is being pushed by the FDIC, but so far it's not clear if the Treasurer and President Bush are willing to allot part of the $700 billion bailout to to cover the $24 billion cost to make it happen (even though the bailout said the Fed should "implement a plan" that would "maximize assistance for homeowners). (WP & WP)

Getting lenders to relax loans: The fed hatched an alliance with Wall Street - called "Hope Now" - in the fall of '07 to encourage lenders to rework loan payments on their own. Some families were able to avoid interest spikes in their adjustable rate mortgages while others have gotten late payment deals to avoid foreclosure; as of November '08, Hope Now reports that 860,000 mortgages had been rewritten to help homeowners, while another 1.6 million got extensions on their payments. (WP, WP, NYT, LAT). Some lenders are beginning to move ahead without government coaxing; in November '08 Citigroup announced it would try to rework 500,000 mortgages to stave off foreclosures (LAT).

Other ways to help families refinance. Congress was also considering bills that would help families stuck in sub-prime mortgages refinance into mortgages they can manage - without federal backing. One, which would let bankruptcy judges order refinanced mortgages, got dinged in the Senate. The Senate did approve, however, $150 million for nonprofits to advise families on how to hold on to their homes. (WP)

... or generally prop up the housing market. The House and Senate have okayed a number of bills to rescue neighborhoods from potential blight and breathe life into the real estate market. One measure, okaying $4 billion for states to buy up foreclosed homes and sell or rent them to low income families, ended up in the July '08 housing bill, which also included tax credits (including one for new homeowners, mentioned below). It's not clear how far those tax credits go, but from earlier reporting it seems like $6 billion would go to the housing industry. There were also early signs that Congress would back up local efforts to bankroll $10 - $15 billion in refinanced homes, but the dailies stopped mentioning that effort, so cJ thinks it's been dropped. (WP & NYT)

Regulating mortgage lenders: HR 3915, which passed in November '07, would set new lending standards for mortgage brokers and backers, requiring - for one - that brokers make sure families can cover future payments on "adjustable rate" mortgages, as well as prevent brokers from getting "yield spread premiums" when they steer clients to packages with higher interest rates than they qualify for. It would make mortgage re-packagers (who cut up mortgages and resell them at variable risk) legally liable as well. The administration, meanwhile, proposed new regulations for mortgage lenders, but critics
say they don't go far enough to protect borrowers (WP & WP & NYT) - it looks like a final set of rules is ready to go into effect October, 2009 (WP).

Tax relief: Congress figured the least it could do was not tax families on any mortgage debt they were forgiven, passing HR 3648 in late '07. In '08 the Senate also okayed $1000 in tax relief for current homeowners - and $7000 for those buying foreclosed homes ($8,000 is the figure in an updated Senate bill); a House passed version would give new homeowners a $7500 credit (but one which they'd have to pay back). (WP) Those tax incentives (at the $7500 level for new homeowners) ended up in the mammoth housing bill that passed in July '09.

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Updated November 14, 2008

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