First, let me set the tone: Housing helped wreck the economy, and housing recovery will be necessary to restore the economy.
Yet during the recently completed presidential campaigns, we heard next to nothing about housing. During the debates, it was the subject of exactly zero questions and only a few veiled references in the candidates’ responses. Neither the Obama nor the Romney campaigns seemed to want to talk about it.
With inauguration day — and the swearing in of a somewhat new Congress — just weeks away, I find myself troubled that the tone of the election signaled that housing recovery (weak as it is) has a reduced sense of urgency among policymakers.
It certainly seems the slight uptick in housing numbers has given way to the attitude that this vital part of our economy is on the right track and will simply take care of itself.
That’s clearly the wrong attitude when you put this “uptick” into perspective:
While housing starts are up, they are still just a smidge above the lowest level ever in past business cycles.
While the share of borrowers who are underwater on their mortgages is down, the share remains at a depressingly high level of more than one in five.
Certain parts of the country, such as Las Vegas and Atlanta, are in anything but a recovery.
Even though the election is over, it is important to note that both former candidates’ economic advisers (informal or otherwise) pitched important ideas — with bipartisan possibilities — for housing.
In fact, Barack Obama partially implemented one of the ideas advocated by one of Mitt Romney’s leading economic advisers — Glenn Hubbard.
As far back as 2008, Hubbard — along with Columbia University colleague Chris Mayer —proposed allowing all current mortgage borrowers to refinance at the market rate of interest, whether they owed more on their house than their mortgage or not.
While this idea rewards borrowers who are current on their mortgage, it doesn’t have any major unanticipated downsides for investors. (Mortgages generally allow borrowers free prepayment). It reduces payment stress and allows borrowers, if they choose to do so, to shorten their term and build equity faster, thereby reducing the time necessary to get right-side up on a mortgage.
If a borrower with 27 years to go on a mortgage and a 6.6% interest rate keeps her payment the same and refinances into a 3% rate, she can pay off her mortgage in less than 16 years. Most important, for a borrower whose house is worth 80% of the value of the mortgage, the time it will take to get right-side up drops from more than 10 years to around four years — or less than the length of a typical car loan.
The second version of the Home Affordable Refinance Program, HARP 2.0, attempts to do just what Meyer and Hubbard proposed. While it has been somewhat successful, HARP 2.0 still places too many hurdles between borrowers and a refinanced mortgage.
The plan put forth by Meyer and Hubbard, however, would just do it automatically. While their proposal reduces the return to investors whose principal and interest are guaranteed, it sharply reduces default risk.
Think about that for a second. An adviser to a Republican develops a plan filled with outcomes that a Democrat should love.
REFINANCING NOT ALWAYS ENOUGH
That said, for borrowers in places with double-digit unemployment and house price declines in excess of 50%, refinancing is not enough. Advisers to both Obama (Alan Blinder) and Romney (Martin Feldstein) suggested that some form of principal forgiveness makes more sense in these places. To prevent borrowers from reaping windfalls in the event of a market recovery, any reduction in debt would at least be partially offset with equity to the lender. As a result of the ideas put forth by these supposedly competing advisers, homeowners who are under pressure could move while still giving investors part of the upside.
Unfortunately, we never heard anything about any of these ideas on the campaign trail. Sadly, it’s only through close examination of the candidates’ economic teams that we find a potential area of bipartisan agreement on one of our most pressing economic issues.
Perhaps now it’s time for our elected officials to pay closer attention to this common ground that has been staring them in the face for months.
