The current administration’s efforts to help homeowners navigate the depressed housing market have been “not enough,” according to the President. In a recent town hall event, users from across the nation took to their Twitter feeds to ask the President questions — and hear his far lengthier replies — about the housing market.

Ideas floated around the White House range from relaxing Fannie Mae and Freddie Mac’s rules for loans to investors to incentivizing lenders to reduce principal for underwater homeowners. So far, no efforts have been officially endorsed, a tragedy of Japanese proportions. [For more information on the Japanese recession and its negative effect on that country’s economy, see the September 2009 first tuesday article, Beware the drastic measures brought on by desperate times.]

With Congress unlikely to provide additional funding, the administration is brainstorming ideas that do not require congressional approval. Thus, circling around Fannie and Freddie seems to be the best option.

One proposal has the government sponsored entities (GSEs) renting some of their foreclosure inventory, which totaled 218,000 at the end of Q1 2011. They are projected to take back upwards of 700,000 homes in the next year.

first tuesday take: “Not enough” is not enough said. The housing subsidy served as a temporary fix in 2009, but without a goal beyond the following year’s buyers, it did nothing for the long-term market except reduce the quantity of buyers and prices for 2011.

All parts of government totally underestimate the magnitude of this real estate recession. Nobody has yet acknowledged the importance of clearing out lenders’ shadow inventory. Their efforts will continue to flounder until they take housing recovery seriously by making lenders take their due losses.

One important step has been taken. Government-owned Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) are tools of guarantee the administration is rightly using to fulfill the government role as the lender of last resort.  Without the availability of purchase-money mortgages to finance home sales, homebuyers will not buy under present conditions.

Once the housing market begins to recover, the heavy reliance on the GSEs and FHA guarantees will quickly be transitioned to what is properly becoming a healthy private mortgage insurance (PMI) industry. [For more information regarding the administrations mortgage reform plans, see the March 2011 first tuesday article, Mortgage market reform from the executive branch.]

As for California’s negative equity homeowner assistance, expect none.  Neither we nor the administration will see a housing market sales volume or price recovery until mortgage cramdowns (principal reductions) become a real option. That will never happen unless lenders are forced to discount or discharge excess loan-to-value (LTV) mortgage amounts either:

  • directly by government regulation; or
  • indirectly by congressional approval for the bankruptcy courts to do so, as the courts effectively did until late 2005.

But first, Mr. President, get behind the cramdown. If we are ever to stabilize the home sales market, see to it Congress finally agrees to reduce principal. We’ll be following your tweets in the meantime. [For more information regarding judicial cramdowns, see the November 2010 first tuesday article, Lenders unwilling to reduce principal balances under California’s ‘Keep Your Home’ program and the January 2011 first tuesday article, The inconsistent cramdown policy.]

Re: “At Twitter town hall, Obama concedes ‘not enough’ done to address housing crisis” from the Washington Post

“U.S. Tackles Housing Slump” from the Wall Street Journal