Where the Housing Crisis Continues
FOR many Americans, the housing crisis is a distant memory. That includes the Supreme Court, which on Monday refused to help out struggling homeowners with second mortgages, ruling that they could not get out from under those mortgages by filing for bankruptcy protection under Chapter 7.
But for many lower-income Americans, the housing bust of 2008 was just a prelude to a new crisis. In many areas, housing prices are stuck below their inflated pre-bubble levels. Until we deal with this fact, entire communities will continue to struggle with high foreclosure rates and a lack of economic mobility.
The problem is rooted in a consequence of the post-2008 return to sane mortgage underwriting practices. Loan officers are no longer handing out mortgages left and right, but instead are tying them to borrowers’ income. As a result, housing prices can rise only if incomes rise, or if people can spend a greater share of their income on housing.
However, the poorest fifth of Americans already spend more than 40 percent of their income on housing, compared with less than 31 percent for the upper fifth, according to government data.
Meanwhile, real wages for most Americans have been flat or falling for decades. Absent an extraordinary increase in income for low-income families, home prices in low-income areas aren’t going anywhere.
This disparity between high- and low-income neighborhoods is evident in the numbers. The Standard & Poor’s/Case-Shiller National Home Price Index for March was over the March 2004 index, and national median home prices, according to the real estate website Zillow, are just over what they were 10 years ago.
But the numbers in many of our nation’s low-income neighborhoods are far different. In Chicago, home values in Sheffield Neighbors, a well-off neighborhood on the city’s north side, have risen almost 9 percent in the last 10 years, according to Zillow. But in the working-class neighborhood of Wrightwood, southwest of the Loop, values are 18 percent lower than they were 10 years ago. And for Chicago as a whole, home values are still 22 percent below where they were 10 years ago.
These disparities hold even in cities in which housing prices are flat or rebounding. In Phoenix, home prices are roughly flat over all, but neighborhood prices range from 16 percent growth to a 27 percent drop over the last decade.
Homeowners who are underwater aren’t building any equity, so they have little incentive to maintain their homes. If they can find a better-paying job somewhere else, they can’t sell their home and move away. And if they get sick or lose a job, they are at greater risk of foreclosure because they can’t sell the house to get out from under a payment they can’t afford.
So what’s the right thing to do?
First, we have to start taking principal reduction seriously. Regulators at every level, as well as the Financial Accounting Standards Board, must encourage financial institutions to do what they should have done in the fourth quarter of 2008: recognize their losses and write down the value of mortgages to current market levels.
A similar shift is needed at the Federal Housing Finance Agency, which regulates the housing giants Fannie Mae and Freddie Mac. National mortgage modification programs should be adjusted to encourage lenders to pursue principal reduction. Tax relief for homeowners who receive reductions should be extended so that write-downs aren’t taxed as income, creating a large tax bill that poor families can’t afford.
And we should consider allowing judges to take a loss on mortgages for homeowners in bankruptcy court, where mortgages are currently a protected class of unalterable debt.
The federal government should also officially designate underwater neighborhoods and communities, not just individual homes. For longtime owner-occupants in such neighborhoods, we should consider a fully refundable tax credit for the total cost of home repairs. Lenders could then provide financing to homeowners in anticipation of the credit. That way underwater homeowners can maintain their homes, even though they have no equity to borrow against, and will never recoup the cost of the repairs.
Third, homeowners in underwater neighborhoods who enter into a legitimate sale to a third party should have the difference between their selling price and their outstanding mortgage automatically forgiven, so that they are free to sell without the burden of seeking approval for a short sale and without an adverse impact on their credit scores. They won’t make a profit off the sale, but with such a program in place they will be able to sell their house and move for a better job or to be closer to family.
Finally, homeowners who work to get out from under their underwater mortgages need to be able to repair their credit in short order so that they can re-enter the homeownership market and again begin to build the kind of equity that helps create financially stable families.
Programs like these aren’t free. But we could cover some of the cost with the multibillion-dollar settlements that regulators have reached with banks over the last two years.
If we don’t act, we will continue to build a generation of low-income residents who are hostage to their mortgages, unable to build equity, unable to participate in the American dream. It’s a shame that the technical aspects of bankruptcy law that the Supreme Court upheld ignore that fact. Thousands of homeowners are going to pay the price.
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