There is much that is praiseworthy about the President Obama’s Homeowner Affordability and Stability Plan. It is an intelligent plan that recognizes the seriousness of the housing crisis and the need to restore confidence in housing markets.
First, the plan distinguishes between different types of home mortgage borrowers who find themselves in distress (either due to unaffordable monthly payments or because they are “under water”). The plan lays out the following categories of borrowers who will NOT be assisted: speculators, and those who bought homes that are unsuitable for their economic circumstances ( folks who bought homes they knew from the beginning they would never be able to afford )
The President did a service to homeowners by plainly stating: This plan will not save every home.
However, a serious gap in the proposed plan is a lack of a plan to help homeowners in “unsuitable” housing to transition to a more suitable/affordable housing situation either as homeowners or renters.
Second, the plan embodies the notion of shared costs , where the costs are shared by the lender as well as the government (or taxpayer). The plan will only help lenders who are willing to reduce the monthly payment to 38% of the borrower’s income. Then the government will step in and reduce it further to 31%. This is a sensible feature of the plan that requires lenders also to step up to the plate.
Third, the plan has a provision to assist renters in foreclosed properties that are facing evictions. Approximately 40% of the households who face eviction because of foreclosure are renters
Obama’s Housing Plan includes $1.5 billion to provide relocation and other forms of assistance to renters displaced by foreclosures (and also to reduce homelessness). This is in addition to the $2 billion in Neighborhood Stabilization Funds which might also be applied to converting foreclosed properties into affordable rental housing and to help reduce foreclosures.
Fourth, the plan moves beyond targeting just the homeowners facing foreclosures to the broader housing market. The $200 billion commitment to Fannie Mae and Freddie Mac is intended to strengthen confidence in home mortgage credit markets and create ample funds for new purchases in the housing market.
Overall, the plan attempts to strike a balance between providing no help to the homeowners in distress (a position that many people support especially on the grounds that about 90% of mortgage holders are not facing this difficulty and are responsibly paying their mortgages on time) and responding to families in distress whose housing problems are impacting neighborhood property values, consumer sentiment and the entire economy. Both borrowers and lenders (and servicers) are provided with incentives under the Plan to keep payments current and sustain homeownership.
The Plan also states that it will not help dishonest lenders who acted irresponsibly:
It will not help dishonest lenders who acted irresponsibly, distorting the facts — distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better.
But it is not clear how such lenders will be identified or how homeowners who borrowed from such lenders will be helped without the lenders themselves being helped. The biggest gap in this plan is that it does not say what the government will do about such dishonest lenders. There is no mention of launching anti-fraud prosecutions against such lenders. A vigorous anti-fraud prosecution and seeking compensatory and punitive damages from the offending lenders needs to be an important plan of a sound housing plan. While such prosecutions may be launched at the state level by state attorneys general, the federal plan needs to forcefully state that this is one strategy for providing relief to homeowners in distress.
This strategy has several advantages: it creates legal precedents that will help prevent future fraud against borrowers and hence help build confidence in the lending system, it makes the offending lenders pay for rescuing homeowners in distress, and it is largely self-financing.
A federal plan could also make funds available to states to assist with the prosecutions and also to make immediate compensation available to the victims of fraud, pending the court trials. This federal expenditure will be recoverable from the damages that the guilty lenders will be made to pay by the courts. Several states have already launched anti-fraud prosecutions against lenders that have resulted in compensatory awards and beneficial modifications of loan terms for the borrowers.
While establishing 31% of income as an affordability standard for homeowners (as the Plan does) is laudable, the Administration needs to recognize that very large shares of American renters pay more than that for housing. Unaffordable housing is a quiet crisis that has been plaguing U.S. renters for more than a decade. It is a quiet crisis because the people bearing its heaviest burden are low-income families and the shocking statistics in the rental sector have not made newspaper headlines. Although the number of homeowner households is more than twice the number of renter households, there are more renter households that pay more than half of their income for housing than homeowner households with similar housing cost burdens.
Among renters in the bottom income quartile (or 25% of income), more than one out of two pays more than half of income for housing. On the other hand, among homeowners in the bottom quartile, a much smaller, though sizable, share (41.9%) pays more than half of income for housing.
Renter affordability is important if renters are to have enough income to invest in their healthcare, retirement, and in their children’s education. Renter affordability is also important if families are to set aside enough income to afford a decent down payment for buying a home so that they may embark on a path of responsible and sustainable homeownership.
It is about time the Administration announced its Renter Affordability Plan .