Let’s Party Like It’s 2009
The housing debate is finally taking center stage in Washington, but I am afraid that it’s too little, too late.
First, the President gave his most important speech on housing reform Tuesday and signaled broad support for a Senate plan that would scrap Fannie and Freddie and replace them with industry financed insurance to guard against future defaults of mortgage-backed securities. In addition, the President implicitly began to break the news to the American public that housing reform is going to result in fewer people owning houses. I have no doubt that on housing reform, as with many other issues, the Senate and the President could come together on a compromise within weeks, but the way our darned Constitution works, they would also have to get whatever plan they agree to through the House, which agrees that Fannie and Freddie should be eliminated but isn’t as likely to go along with any proposal creating new government backed insurance for the mortgage industry.
The question is where was the President four years ago? His speech was the type of speech that could have forced Congress to at least seriously consider including housing reform in Dodd-Frank. Instead, he went along with conventional wisdom, which was that the country’s economy was too fragile to tinker with housing reform. The result is we still don’t have housing reform and our country is more dependent, not less, on government subsidizing of housing.
Meanwhile, the Justice Department and regulators have woken from their long legal slumber and are starting to actually sue major banks for deceptive advertising. The Wall Street Journal is reporting this morning that J.P. Morgan is under investigation by the Justice Department as is Bank of America, for knowingly making false statements about the quality of mortgage-backed securities it sold at the height of the housing boom. NCUA has made similar arguments so far with limited success but perhaps the higher profile of these impending lawsuits will put more pressure on financial institutions to put these matters behind them. I refuse to believe that government lawyers know more about allegedly shady underwriting practices than they did two or three years ago. My guess is that the government was more fearful of bankrupting major financial institutions than it was of going after them for their misdeeds.
Does this mean that there have been no truly important developments in housing lately? Not at all, it’s just that the most important development is getting the least attention so far. Richmond, California, a community hit hard by the foreclosure crisis, is moving forward with a plan to use eminent domain to purchase underwater property and then refinance the loans to homeowners at a price that would allow them to stay in their houses. The plan sounds simple enough but it’s actually quite radical. Many of the mortgages Richmond is going to purchase are owned by bond holders in pools of mortgage-backed securities. Not surprisingly, there is already a case being filed today saying that Richmond’s use of the eminent domain law is unconstitutional.
This may seem like pretty dry stuff but it’s not. One of the reasons why so many servicers have been so unwilling to modify mortgages or reduce mortgage principle has been that they typically hold hundreds of mortgages on behalf of investors in the mortgaged-backed securities they oversee. These servicers are not in a position to agree to write down mortgage loans when doing so will cause their investors a loss.
I’m not the only one paying attention to Richmond’s legal efforts. They have scared the bankers enough that a provision blocking the lawsuit was included in the housing reform proposal voted on by the House Financial Services Committee. Pure speculation on my part, but if the lawsuit gains traction you may see some serious movement on housing reform. There are a lot of major banks out there that would rather see this lawsuit quashed and may prod the House to come to the bargaining table if that’s what it takes.