48% Underwater

This must have happened while I went on vacation:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Ho. Lee. Crap.

Being underwater not only affects being able to keep the home, but it profoundly affects individual mobility. You become chained to your home, waiting for it to increase in value, even if there are no jobs in your area or you get an attractive offer elsewhere. That's just one element of how foreclosures and underwater homes impact the economy.

How in the world can we fix this? So far the foreclosure mitigation options offered by the White House have been inadequate. Though sales are creeping back, if a second foreclosure wave strikes the market could remain unsettled for some time. The Obama Administration is moving toward encouraging affordable rental units, which I think is a good sign.

The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.

The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.

Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home.

That deals with a future problem of ensuring that the only people with mortgages are the ones who can pay for them, however. It does little for those underwater in their home or facing foreclosure right now. For that group, I think we need to seriously look at right to rent, converting homes that would otherwise be foreclosed into rental properties for the families for a set period of time. This would solidify neighborhoods, give banks a revenue stream instead of having a foreclosed home sit on the market (although they're probably making more from foreclosure in the short term, as it stands right now), and help people stay connected to their communities. Dean Baker writes:

It's time to try a new route for helping homeowners. There is a simple alternative: Congress can pass legislation that gives homeowners facing foreclosure the right to stay in their home as renters. This "right to rent" policy would require no taxpayer money, no new bureaucracy and could immediately benefit homeowners facing foreclosure.

The basic idea is simple. In recognition of the extraordinary crisis, Congress would give families that took out mortgages at the peak of the boom and are facing foreclosure the option to remain in their homes as renters for a substantial period of time -- five to 10 years -- while paying the market-rate rent. Earlier this year, Freddie Mac launched a similar policy, giving former homeowners the option to lease their recently foreclosed properties, but on a month-to-month basis. That was a positive step, but it does not give families the housing security they need....

Although they would lose ownership of their homes under "right to rent," the residents would be able to stay in their homes, neighborhoods and schools. This would provide families facing foreclosure with needed stability and housing security.

This would also help with loan modification, as banks would have a choice to change terms or accept rent. Much like cram-down, it would put the playing field level again, instead of hopelessly tilted in favor of the banks.

We need to do something with the first principle that reducing foreclosures is the goal, not satisfying the banks. Cram-down probably makes more sense, but I appreciate the thought behind right-to-rent.

...slightly related, this WSJ editorial criticizing Vermont for having too many well-informed consumers and industry regulations, leading to "pitfalls" like fewer foreclosures and healthier banks, is worth reading if you want a hoot. If only we in California had the pitfalls of Vermont!