AMERICA MUST DO MORE TO HELP ITS HOMEOWNERS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING - A MUST READ )

America must do more to help its homeowners

By Mort Zuckerman

Published: March 4 2010 20:12

America’s housing crisis has not gone away. If anything, it is getting more severe. Today, median single family house prices nationwide are down by slightly more than 30 per cent from their early 2006 peak. Fusion IQ, the research group, estimates that excess inventories will push prices down by a further 10 per cent. This is a critical issue because home equity was for years the largest asset on the balance sheet of the average American family.

The sheer number of empty homes overhanging the residential property market points to lower prices. There are an estimated 7m homes empty today, and an estimated 7.7m houses and condominiums behind on their mortgage payments. This is tantamount to a shadow inventory. More than 4m of those are now delinquent and going through some form of foreclosure or related procedures that will put them on the market in the next year or two. Fannie Mae’s 90-day delinquency rate is now roughly 5.5 per cent, double that of a year ago.

Home sales are depressed, too, by competition from some 6m rental vacancies, or 11 per cent of total rental supply. Median asking rents have been declining by an estimated 3.5 per cent over the past year – and that is accelerating.

There is no cheer in the new residential numbers either. January’s new home sales plunged by more than 11 per cent month-on-month to an annual rate of 309,000 units, the weakest on record. It now takes a record 14.2 months to sell a finished house. In the boom years, it took about three.

Even worse, the median price for new homes sold was $203,500, almost a seven-year low, and that for existing single-family homes fell 3.5 per cent month over month to $163,600, a new eight-year low. Inventories rose to a 9.1 month supply, which on top of the shadow inventory of unsold houses and those in the foreclosure pipeline does not bode well for homebuilders or housing. Neither does the sharp decline in mortgage applications to the lowest levels since May 2007 and the rise on the 30-year mortgage rates to more than 5 per cent.

Roughly one in four mortgages today exceeds the house’s value – approximately 10.7m homes. American Corelogic, the research provider, estimates an average deficiency per home of $70,700 or an aggregate of about $800bn. An additional 2.3m homes had less than 5 per cent equity. The remaining equity for many other homeowners is at historic lows. With declining prices beginning to hit the middle to higher ends of the housing market, we are looking at another foreclosure wave.

The federal government’s “Making Home Affordable” loan modification programme has been a dud. It has helped roughly only 116,000 households. Research shows that when a home’s value falls below 75 per cent of the outstanding mortgage debt, owners think seriously about walking away. First America reports that 5.1m or 10 per cent of homeowners will see their property values fall below 75 per cent of their mortgages by June 2010. Roughly $750bn of residential mortgages are upside-down (in negative equity) today, the equivalent to the entire fiscal stimulus programme.

Government bears a unique responsibility, for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac contributed to the crisis. Politicians stipulated that 55 per cent of their loans had to go to borrowers at or below the median income level, with nearly half of these going to low-income borrowers. The two organisations became heavily leveraged, with an equity of less than 2 per cent of their total capital structure – for each dollar of capital, they owned or guaranteed more than $50 in mortgages.

No one monitored the consequences. At the end of 2008, these two agencies held or guaranteed about 10m subprime or Alt-A mortgages (home loans made to borrowers with slightly better credit histories) through mortgage-backed securities, with a principal balance of $1,600bn. These are the loans that began to default at unprecedented rates in 2008 and 2009 and forced the government to take control of Fannie and Freddie.

Sooner or later, the government may be forced to subsidise the mortgages of underwater homeowners. One solution might be to revive the Depression-era Home Owners’ Loan Corporation. Such a body would buy mortgages that were close to or in default from banks and replace them with ones homeowners could afford. The banks would receive federal loans in exchange for shaky mortgages. This may be the only way to reduce mortgage principals to the value of the houses. It is estimated it would take more than $1,000bn to do this.

Alternatively, the government must simplify its unsuccessful loan modification programme, which subsidises lenders to rework bad loans. The usual method – lowering the monthly payments by cutting interest rates – does not work well for jobless and underwater borrowers, who often cannot make even reduced payments. Underwater borrowers need principal reductions, not just lower rates, and banks are loath to do this as it requires them to take big up-front losses. Standard & Poor’s estimates there will be a 70 per cent default rate on revamped loans (up from 50 per cent today) because unemployment is expected to remain elevated. If foreclosures soar, we may be facing another crash in housing prices.

But let us be clear: until the housing crisis is remediated, it is almost impossible to envision anything resembling a major recovery.

The writer is editor in chief of US News & World Report and chairman and co-founder of Boston Properties

Copyright The Financial Times Limited 2010.