Uncertainty 4.0

What are the most pressing issues in housing policy today?

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The noted science fiction writer Ursula K. LeGuin might have been referring to the present day when she opined that “the only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next.”

With all due respect to Ms. LeGuin, I think most of us have had enough intolerable uncertainty, at least when it comes to the state of our economy.

Markets and people hate uncertainty—especially in a prolonged circumstance. Short of a multitude of national disasters or, heaven forbid, another attack on our soil, there is no other singular issue that is negatively impacting almost every American family like our stagnant and uncertain economy—fueled in large part by the nagging housing crisis. A crisis, I would add, that has many sub-sets.

Too many borrowers are burdened with mortgage payments that don’t realistically align with their homes’ present value.  Beyond the current levels of REO, millions of homes are somewhere in the foreclosure process but have not yet reached the market. Some estimates put the number of homes in this category at more than 5 million.

Although some markets have rebounded slightly, no one is quite sure if next year will be THE year we officially hit bottom (Note: the preceding sentence has been written every December for the last three years).
 
Despite a favorable interest rate environment, many potential borrowers remain concerned about the anemic state of the economy and are hesitant to buy.    In their recent mortgage activity forecast, the MBA believes that the 2012 origination volume will be at its lowest level since 1997.
 
And in the recent quarterly survey of homebuilders, more than half indicated they were putting their construction projects on hold until the market improves.  

While some housing industry professionals and economists might call this good news, as we hopefully make a dent in the existing inventory, there is no mistaking the economic value homebuilding brings communities including jobs and tax revenue—which for too many communities has now become stagnant. 
 
At a recent meeting of homebuilders and mortgage professionals attended by several government regulators, the builders expressed mild outrage at what they had been hearing from lenders—regulators were telling them to not do construction lending.  “We’re dying out there,” was the comment from one homebuilder that elicited the longest pause of the discussion.  The regulator’s “we’ll look into it” response, even extended in a sincere tone, did little to assuage their anger.
 
Affordable rental housing and community development advocates also have little to cheer about from the recently signed HR 2112 Minibus Bill, which cut HUD funding by $3.8 billion from 2011 levels.  Among the programs cut were Section 202 elderly housing, HOME, and Section 8 vouchers.  Presumably it could have been worse.

As we approach year-end we cannot help but wonder if 2012 will exceed our somewhat low expectations.  There are some glimmers of optimism—Fiserv recently reported that 95% of the close to 400 metropolitan areas will actually see an increase in house prices, although more than likely these increases will be measured in fractions of a percent.  This is a reversal from the previous year, were most areas saw another house price decline.  And most economists believe interest rates will remain low throughout 2012.

And who knows—the Obama administration might actually implement a program to unload some of the housing inventory to investors, provided there is an affordable rental component.  They will certainly have political cover complements of the many responses they received from the FHFA, HUD, and Treasury RFI—they could simply say they are implementing what housing experts and advocates have said they want.

While my crystal ball is somewhat occluded, I will offer that the last few years have brought new meaning to Ms. LeGuin “intolerable uncertainty”. 

Going forward, only certainty will relieve the anxiety of nervous first time homebuyers and move up borrowers.  

Only certainty will bring private capital back to the mortgage market. 

Sadly, the missing essential ingredient to more certain times is political urgency—the type that would drive lawmakers to implement a clear, consistent, and compelling bipartisan housing policy that focuses on affordable rental housing, sustained homeownership and private investment in America’s mortgage finance system.  

Brian Montgomery is the Vice Chairman of The Collingwood Group LLC.

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