U.S. Home Equity Level Hits Record Low
Wendell Cox says he was “not the least bit surprised” by a Federal Reserve report showing the nation’s homeowners have less equity in their properties than at any time since World War II, which ended in 1945.
“Think about what’s happened to the housing market,” said Cox, principal of Wendell Cox Consultancy, an international public policy firm specializing in urban policy, transport and demographics. “A lot of people bought houses during the bubble, especially in California, Arizona, Nevada, Florida, and some other places where they also have strict land-use regulations, which by themselves drive up housing prices. “
Cox said in the biggest bubble markets, “If you were in a community where the median price was $250,00 in the late-1990s and bought a few years later when median prices hit $600,000, even if you had a good downpayment – say $100,000 down and a $500,000 mortgage – the house is now worth maybe $350,000, and you’re underwater.”
One in Four ‘Underwater’
Approximately 60 percent of homeowners have a mortgage. The rest have either paid off the loan or bought with cash. Of those with a mortgage, nearly one in four are “underwater,” meaning the outstanding balance on the mortgage exceeds the value of the home, according to CoreLogic, a private real estate research firm.
The Federal Reserve report, released June 9, stated the average homeowner has 38 percent equity – meaning Americans own just 38 percent of their homes clear of loans -- down from 61 percent in 2001. Falling housing values and easy loan terms that allowed millions of people to buy houses with littler or no money down are the main reasons.
Cox places most of the blame on government policies. He said government caused the problem in “at least two ways.” One way was through manipulation of interest rates.
‘Fed Opened the Dam’
“Private lenders are not without blame, but the fact is, if the Fed hadn’t opened the dam with respect to easy money, things would have been kept under better control,” Cox said. “In California, there were documented cases where people with $100,000 incomes were getting loans of $1 million. You can’t sustain that.”
The second way was through restrictive land-use policies that “draw people in to areas and drive up prices. Land-use and lending were both spurred by government activity.”
Douglas French, president of the Mises Institute in Auburn, Alabama, said “malinvestments” in housing that caused prices to soar “must be liquidated. However, government intervention in the form of low interest rates, tax credits and the bailing out of lenders have only served to delay the adjustment of the housing market. “
Fannie, Freddie Also Get Blame
French places also much blame for the growth and collapse of housing values on government actions, including those involving Fannie Mae and Freddie Mac, “government-sponsored entities” that facilitated the packaging and selling of mortgages and today back more than 90 percent of home loans. The two organizations have received more than $160 billion in federal bailout money to stay afloat.
“Fannie and Freddie should be allowed to fail” with their assets sold at a bankruptcy auction, French said. “The assets – mortgages -- would trade at a fraction of face value. Buyers of the notes would quickly engage borrowers and make deals reducing the principal amounts due for borrowers who are paying. Those living in houses not making payments and can never possibly make payments will be foreclosed on with the houses sold to those that are capable.
He added, “There's much talk about zombie banks. Well, there are zombie homeowners who haven't made payments in months and in some cases a couple years, because banks are allowed to keep these mortgages on their books without writing them down or off, while at the same time refusing to negotiate with debtors.”
French said he believes home prices will continue to fall in the foreseeable future.
“People are starting to realize that home equity is not really wealth,” he said. “It just provides a bit of comfort that you can sell your house if you need to relocate. With government backstopping the banks while at the same time providing 90-plus percent of mortgages, this quagmire may well last for many years.”
Ownership Questions Persist
Another possible blow to housing values is evidence that possibly millions of mortgages were bought and sold without the transactions having been properly recorded. In addition, there are criminal investigations into allegations that some law firms and banks have illegally churned out foreclosures by falsifying documents, forging signatures, and making perjurious claims.
French refers to this as the “MERS issue.” MERS stands for the Mortgage Electronic Registration System, which was created by the real estate finance industry to electronically track mortgages
“Can these lenders prove to the courts that they have standing to foreclose?” French said. “MERS claims it owns title to half the mortgages in America but has never invested a dime. The company was just a conduit serving the securitization process. All was well in the boom, moving bundles of mortgages around electronically. However, judges like to see paper and ink before they allow a lender to foreclose. The assignments of many of these mortgages were just plain not done with no paper trail or recording.
“If the government had stayed out of the mortgage business and allowed failure, this would all be over with by now.”
Steve Stanek (firstname.lastname@example.org) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate Policy News.