To Shore up the Recovery, Help Housing

economic & COnsumer credit Analytics

May 25, 2011

SPECIAL REPORT To Shore Up the Recovery, Help Housing

Prepared by Mark Zandi Chief Economist +610.235.5000

To Shore Up the Recovery, Help Housing BY Mark Zandi

he five-year-old housing crash continues to threaten the U.S. economic expansion. Home sales and housing construction remain weak, while house prices are falling again in many parts of the country as foreclo- T sure and short sales are ramping up. It is hard to be enthusiastic about the Although none of these steps are particu- Nationwide house prices are falling again. economy’s prospects as long as house prices larly satisfying or likely to be popular, the The Fiserv Case-Shiller national house price are declining. A house is usually a household’s outcome will be worse if policymakers stand index has dropped by a third since peaking in most important asset; many small-business by while a weakening housing market under- the first quarter of 2006. The fragile stabil- owners use their homes as collateral for busi- mines the economic expansion. ity in prices that prevailed for most of the ness credit, and local governments rely on past two years was broken in recent months property tax revenues tied to housing values. Five lean years as more distressed properties were sold. In Most worrisome is the risk that housing The housing crash is more than five a well-functioning housing market, prices will resume the vicious cycle seen at the years old. Sales of existing homes—a mea- should rise nearly 3% per year.3 depths of the last recession, when falling sure of housing demand—languish near prices pushed more homeowners under an annual rate of 5 million units, of which Economic fallout water—their loans exceeded their homes’ about a third are foreclosures and short Although housing is not the drag that it market values—causing more defaults, more sales. Sales of new homes are even bleaker, was during the worst part of the recession, it distress sales, and even lower prices. That running at a record low rate close to remains a significant weight on growth. This cycle was broken only by unprecedented 300,000 units per year. In a well-function- is particularly disappointing since housing is monetary and fiscal policy support. ing housing market, about a million more often a major source of growth early in an The gloom in the housing and mortgage new and existing homes would change economic recovery. markets notwithstanding, there are reasons hands per year, and less than a tenth would Falling house prices and the resulting to be optimistic that housing’s long slide will be distress sales.1 hit to household wealth remain a serious come to an end soon. While a mountain of Housing construction—the marker for problem. Some $6.5 trillion in homeown- distressed property remains to be sold, inves- housing supply—is even more depressed. tor demand appears strong. Prices have fallen Single- and multifamily housing starts are 3 House prices should grow somewhere between the rate of enough to allow investors to profitably rent out running at close to 550,000 units annual- household income (4% per annum) and overall price inflation (2% per annum). Prices are ultimately determined by their these homes until the market recovers. Rental ized, and manufactured home placements replacement cost, which is equal to the sum of the cost of land vacancy rates have fallen meaningfully over the barely reach 50,000 per year (see Chart 1). and the cost of construction. The cost of land is determined by the opportunity cost of that land or GDP per developable acre. past year, suggesting that new construction is This is the weakest pace of residential con- The growth in GDP per acre is equal to the growth in house- slow enough to let builders work down the still- struction since World War II. A well-func- hold income (assuming that the profit share of GDP remains constant). Construction costs will grow at the rate of overall considerable number of excess vacant homes. tioning housing market would be producing inflation (in the long run, as material and labor costs can vary Nonetheless, the risks remain uncomfort- closer to 1.75 million units annually.2 substantially in the short run). Since the proportion of house prices that are accounted for by land costs varies considerably ably high. Policymakers may thus want to from place to place (a very high percentage in San Francisco and consider taking additional steps to support a low percentage in Des Moines), the growth in house prices will 1 A housing market is considered to be functioning well when also vary considerably. For the past quarter-century or so (the housing temporarily. These might include fa- the broader economy is at full employment and growing at recent boom-bust aside), house prices have been growing at cilitating more mortgage refinancing, delaying its long-run potential rate over the course of the business a rate closer to household income. As the incentives for hom- and housing cycles. eownership steadily increased (pecuniary and non-pecuniary), a reduction in conforming loan limits, and sup- 2 This housing supply is supported by an average annual 1.25 mil- households spent as much of their income on housing as pos- porting more mortgage loan modifications— lion household formations, the obsolescence of 300,000 hous- sible. As these incentives have likely peaked and may very well ing units, and the construction of 200,000 vacation homes. decline, households will devote less of their income to housing, with principal reductions—more aggressively. and prices are likely to grow more closely to the inflation rate.

Chart 1: The Housing Crash Continues Chart 2: Homeowners’ Equity Is Halved

2,400 200 14,000 175 2,000 12,000 Homeowners’ equity has fallen by 150 $6.5 tril from the peak and $1 tril over 10,000 1,600 the past year 125 8,000 1,200 100 6,000 75 800 4,000 50 400 Housing starts, ths units (L) 25 2,000 Case-Shiller® Home Price Index, 2000Q1=100 (R) 0 0 0 75 80 85 90 95 00 05 10 55 60 65 70 75 80 85 90 95 00 05 10 Sources: Fiserv, BEA, Moody’s Analytics Sources: Federal Reserve Flow of Funds, BEA, Moody’s Analytics ers’ equity has been lost in the housing There are other serious but harder to quan- current on other debt obligations—has crash, approximately $1 trillion of it just in tify effects from falling house prices such as risen and now accounts for approximately the past year (see Chart 2). Given our esti- a reduction in labor mobility—an important one-fourth of all defaults. mate of the impact on consumer spending way for the economy to adjust to shocks—and Decisions to default depend critically on from lost housing wealth, this will shave the erosion of retirement savings for low- and expectations about future house prices. If almost a half percentage point from real middle-income homeowners. homeowners think prices will rise, they are GDP growth this year.4 The loss is particu- more likely to hold on; if they believe more larly hard on middle-income households, Vicious cycle price declines are coming, they are likely to which have benefited less from rising Falling house prices could threaten the eco- give up. This can quickly become a vicious stock prices than their higher-income nomic expansion if they become self- reinforc- cycle, as occurred during the depths of the neighbors have. ing, pushing more homeowners under water, recession. Only a massive policy effort broke Shaky house prices have also made it dif- prompting more mortgage defaults and more it. The federal government put Fannie Mae ficult for small-business owners to use their distress sales and thus more price declines. and Freddie Mac into conservatorship and homes as collateral for loans. Bank lending With an estimated 14 million hom- the FHA aggressively expanded its lending. to small businesses has picked up over the eowners underwater, half by more than Even now, the federal government originates past year, but it is hard to see how credit 30%, this is a real possibility (see Chart 3).5 more than 90% of new mortgages. will flow freely until house prices rise again. Adding to the concern, the average under- In addition, conforming loan limits were Since small businesses are a key part of job water homeowner’s debt exceeds market increased and three rounds of housing tax creation, this is a significant impediment to value by nearly $50,000. It does not take credits were enacted as part of the federal a stronger job market. much to induce many in that situation fiscal stimulus. The Federal Reserve pur- Strapped local governments are also to turn their keys over to their lenders; a chased $1.25 trillion in mortgage securities struggling with the impact of falling house leaky roof or broken air conditioner might to bring down mortgage rates as part of its prices on property tax revenues. Despite ris- be sufficient, particularly if rental housing first round of quantitative easing. The gov- ing millage rates in many parts of the coun- is available nearby for less than the cost ernment also took part in the mortgage-loan try, tax revenue is growing near its slowest of the mortgage. Studies based on credit modification effort via the HAMP plan and pace on record. Given the lag between file data suggest that the share of strategic encouraged refinancing via the HARP plan. market price changes and tax assessments, defaults—involving homeowners who are Although it is easy to criticize individual revenues are likely to slow even more in elements of this policy response, it is im- the coming year. Local governments will 5 CoreLogic estimates there are closer to 11 million underwater portant to remember that it was devised thus have little choice but to continue cut- homeowners. The Moody’s Analytics data are based on actual and implemented quickly, under extreme mortgage debt outstanding from Equifax credit files, while ting budgets and laying off workers. Local CoreLogic’s estimate is based on debt outstanding at time of circumstances. Moreover, in its totality, the government payrolls are down more than origination. The Moody’s estimate of negative equity is nearly policy response worked; the housing market the same as CoreLogic’s California, much lower in Florida, and 400,000 below their peak and are shrinking higher most everywhere else. CoreLogic may have some dif- stabilized beginning in 2009. by about 10,000 jobs per month. ficulty measuring debt outstanding in rural or exurban areas Yet if housing were to begin another where homeowners generally have little equity even in good times (since house prices never rise much) and go into small dark cycle, the policy response, if any, negative-equity positions in difficult times. The Moody’s esti- would not be nearly as aggressive. There 4 See “The Wealth Effect,” Mustafa Akcay. Regional Financial mate is much higher in Texas, for example. CoreLogic data are Review, November 26, 2008. also unavailable for a half-dozen states. is little political appetite for another big

Chart 3: Millions of Homeowners Underwater Chart 4: A Mountain of Distressed Homes Homeowners’ equity distribution, mil of homeowners First mortgage loans, ths 5 4,500 14 million homeowners are under water 4,000 120 days + delinquent and 6.5 million are under water by more 4 In foreclosure than 30%. 3,500 3,000 3 2,500 2,000 2 1,500 1 1,000 500 0 0 > -50% -50%-30% -30%-20% -20%-10% -10%-0% 0%-10% 06 07 08 09 10 11 Sources: Equifax, Moody’s Analytics Sources: Equifax, Moody’s Analytics government intervention in the economy, rises, but prices stop falling once the distress the foreclosure crisis, according to data particularly given Washington’s precarious share peaks, even if it remains elevated. from CoreLogic and FNC. Many distressed fiscal situation. It is difficult to forecast when the distress properties may be in less desirable areas share will peak, as this depends on negotia- and no longer in direct competition with Righting the wrongs tions between mortgage servicers and state nondistressed properties. This suggests that Perhaps government will not need to attorneys general related to the robo-sign- damage to homeowners’ wealth will be less come to housing’s rescue again. There are ing scandals. Yet the peak seems most likely severe, with less economic fallout. hopeful signs that the problems in the hous- to occur late this year. The share of distress The flow of mortgage loans entering fore- ing market are being worked out. While the sales will remain high in 2012—probably closure should also begin to slow soon, since process will not be clean, housing should above a third of all home sales—but prices fewer troubled loans are in the early stage of find its footing by this time next year. should stabilize. delinquency. The number of first mortgage It is encouraging that the flow of first Investor demand for distressed properties loans between 30 and 90 days delinquent is mortgage loans into foreclosure, or more appears strong, particularly in the hardest- declining rapidly (see Chart 5). This reflects than 120 days delinquent (and thus likely to hit markets. Prices have fallen so sharply in a better job market and improvements in go into foreclosure), has peaked. An enor- Atlanta, much of Florida, Nevada, and Ari- underwriting standards since the recession. mous number of mortgages remain in this zona that investors can purchase distressed Mortgage loans originated during the past situation—3.6 million out of 50.6 million properties and cover their costs by renting three years are of excellent quality. loans outstanding—and most will end as them. Many of these markets actually ap- distress sales over the next 12 to 24 months, pear undervalued when comparing house Excess inventory but the key for house prices is the share of prices with household incomes and effective At the same time, builders are slowly home sales that are of distressed proper- rents. Unlike the house flippers who tried working down the number of new vacant ties (see Chart 4). Prices fall when the share to make quick profits during the bubble, homes for sale. Yet the rampant overbuild- today’s distressed- ing during the housing bubble remains a Chart 5: Early-Stage Delinquency Is Falling Fast property investors significant impediment to any pickup in First mortgage loans 30-90 days delinquent, ths, SA seem willing to hold new construction. 2,800 on longer. They in- We estimate nearly 1.5 million excess 2,600 90 days clude both individual vacant homes are either for sale, for rent, 2,400 60 days and institutional in- or being held off the market (see Chart 6). 2,200 30 days vestors and appear The Census Bureau’s Housing Vacancy Sur- 2,000 1,800 to have investment vey counts 10 million actual vacant homes; 1,600 horizons of more about 8.5 million vacancies would be consis- 1,400 than a few years. tent with a well-functioning housing market. 1,200 Meanwhile, prices At the current level of housing demand and 1,000 800 for nondistressed supply, it will take two full years to work off 600 homes are hold- this excess inventory. 06 07 08 09 10 11 ing up better than The situation is not as bleak as this sug- Sources: Equifax, Moody’s Analytics they did earlier in gests, however, because the HVS likely over-

Chart 6: Housing Inventories Have Peaked Chart 7: Rates Plunge, Refis Putter Vacant homes for sale, for rent, and held off market, ths 11,500 4,500 11 Housing supply = 600,000 4,000 Refi originations, $ bil (L) Single-family = 450,000 10 10,500 Freddie Mac fixed rate (R) Multifamily = 100,000 3,500 9 9,500 Manufactured = 50,000 3,000 Housing demand = 1,350,000 2,500 8 8,500 HH formations = 750,000 Obsolescence = 400,000 2,000 7 7,500 Second homes = 200,000 Trend 1,500 vacancy 6 1,000 6,500 500 5 5,500 0 4 90 92 94 96 98 00 02 04 06 08 10 90 95 00 05 10 Sources: Census Bureau, Moody’s Analytics Sources: Federal Reserve, Freddie Mac, Moody’s Analytics states the problem. Recent data from the tion should accelerate. Given that many Restringing HARP 2010 census suggest there are fewer rental young people have lived with their parents With 30-year fixed mortgage rates falling vacancies than the survey implies.6 It is also longer than in normal times, there is a fair back near 4.5%, a policy step we proposed unclear how well many of the vacant homes amount of pent-up household formation nearly a year ago appears attractive again.7 are being cared for, especially in heavily over- that should be unleashed in the next year or This is requiring Fannie Mae and Freddie Mac built markets such as Florida and California’s two. Formations in 2013 and 2014 could be to facilitate more refinancings via the Home Central Valley. closer to 1.5 million per year. Affordable Refinancing Program (HARP).8 This highlights another important point, Housing construction, specifically single- For millions of homeowners, mortgage namely that the excess inventory problem family homebuilding, will take longer to refinancing could significantly reduce is regionally concentrated. Atlanta, Florida, get going. Even as demand revives for new monthly payments and boost their financial Nevada, Arizona, and the Central Valley are homes, it will take time for builders to obtain fortunes, aiding the economic recovery. Yet awash in vacant homes; elsewhere the inven- new-construction and land-development many potential refinancers cannot obtain the tory problem is much less pronounced and funds from banks still digesting the sour necessary interest rates because the tough will thus be resolved sooner. loans they made during the bubble. economy has undermined their credit scores Demand and supply also will not change It will also take time for builders to ramp and home values. together; it is likely that demand for vacant up the process of new-home construction, The Obama administration has tried to homes will pick up more quickly than will which includes everything from acquiring facilitate more refinancing, but its efforts new construction. The principal component land and obtaining permits to assembling have fallen flat (see Chart 7). HARP was of demand is household formation, which equipment on site. Multifamily construction introduced in early 2009 to help refinance has been depressed recently because of the will come back much sooner, likely during loans insured or owned by Fannie and Fred- weak job market. With few job opportunities, the second half of 2011, given strong ab- die; at the time, the administration said the young people have been hiding out in school; sorption, declining vacancy rates, improving program would allow between 4 million and labor force participation has plunged among rents, and more ample multifamily mortgage 5 million homeowners to lower their inter- those 16 to 29 years old. While the data here credit. But single-family home construction est rates to market levels. Yet to date, fewer are sketchy, it appears that at its low point, should also be well off bottom by this time than 700,000 homeowners have refinanced household formation slowed to an annualized next year, when there are far fewer excess using HARP. pace close to 300,000 in early 2010. It picked vacant homes. This is especially disappointing, since up over the past year to closer to 750,000; There are reasons to hope the housing HARP provides significant incentives for this has fueled a surge in rental absorption market can at least limp through the next borrowers to refinance up to 125% of a but is still well below the 1.25 million house- year without additional government support, property’s value, specifically to help under- holds expected to be formed each year in a but the risks are still uncomfortably high. water borrowers. To qualify, a homeowner’s well-functioning economy. A weaker than anticipated housing market As the job market comes back to life and poses a serious threat to the economic ex- 7 See “Restringing HARP: The Case For More Refinancing young people go to work, household forma- pansion—probably the most serious on the Now,” Mark Zandi and Cris DeRitis. Moody’s Analytics Spe- current horizon. It may thus be worthwhile cial Report, October 7, 2010. 6 The Census Bureau’s Housing Vacancy Survey is based on for policymakers to consider steps to ensure 8 The HOME Act, introduced by U.S. Representative Dennis a sample that, given the Census 2010 data, appears to be Cardoza in September, does precisely this. See. Senator Bar- significantly biased. housing remains on track. bara Boxer has introduced similar legislation.

Chart 8: GSE Jumbo Loan Purchases for refinancing bor- be permanent, but it might be worthwhile for $ bil, 2010 rowers who have lost policymakers to extend them for another year. 80 a lot of equity or have Without an extension, Fannie and Freddie’s >$417k and < $625k relatively low credit loan limit will fall from $729,750 in the high- >$625k 11 60 scores. Keep in mind est-cost areas of the country to $625,000. that Fannie and Fred- FHA loan limits in these areas are likely to fall die already bear the even more, since they are defined as the lesser 40 credit risk on these of 115% of an area’s median-priced home or loans; anything that $625,000. The high-cost areas that would 20 makes it easier for be significantly affected are primarily in the borrowers to pay their Northeast and California but include some 0 mortgages on time parts of Florida and the Chicago metro area. Fannie Mae Freddie Mac and avoid default will The higher loan limits affected approximately Sources: Fannie Mae, Freddie Mac, Moody’s Analytics reduce the agencies’ $140 billion in loans originated in 2010, or ultimate cost. less than a tenth of the $1.5 trillion in mort- recent payments must have been on time, Economic logic strongly favors action to gages made that year (see Chart 8). meaning no more than 30 days late within promote refinancing. With current mortgage Reducing the loan limits will test whether the past year, and borrowers must be able rates near 4.5% and the median rate on private lenders are willing and able to step to show sufficient income to meet the new outstanding mortgages above 5.75%, the up as the government steps back, but doing payment schedule. potential rate reduction could average almost so this year may be premature. The nation’s But none of this has helped raise the level 125 basis points. If all agency and government largest financial institutions appear to have of participation, in part because Fannie Mae borrowers with rates above the median refi- the necessary capital to increase lending— and Freddie Mac have imposed additional nance at 4.5%, the gross saving to borrowers assuming a 10% reserve rate, it will take $20 interest rate charges—called loan level price would be around $45 billion a year (18 million billion in capital to support $200 billion in adjustments—for refinancers with higher Fannie and Freddie borrowers x $200,000 new mortgage lending—but homebuyers loan-to-value ratios or lower credit scores.9 average mortgage balance x 1.25%). Clearly, will have to pay higher interest rates than This is an especially large problem in parts of not all this saving would be realized, but even they do now.12 If all goes reasonably well, the the country where the housing market crash a fraction would be a big plus. added cost will be manageable, between 25 and economic downturn have been most se- There are costs involved with facilitating and 50 basis points. vere—which are the same areas where HARP more HARP refinancings. Fannie and Freddie But if the test does not go according to was supposed to help. would receive less in interest, as would other plan, mortgage rates could be much higher Fannie and Freddie are not breaking prec- private investors in mortgage securities than anticipated. This cannot be ruled out, edent in charging higher interest rates to backed by Fannie and Freddie loans. But Fan- particularly given the increased concentra- borrowers with less equity and weaker credit. nie and Freddie (and thus taxpayers) would tion of the mortgage industry since the The two mortgage companies have always be made substantially whole because of the financial crisis and the greater market power done so, because such borrowers are more reduced default rate. Most global investors, of today’s large institutions.13 There would be prone to default. But this standard practice meanwhile, are surprised they have not al- no meaningful cost to taxpayers of delaying is weakening HARP. It also is not clear the ready been refinanced out of more loans. a reduction in the conforming loan limits, traditional rules should apply in this situa- but the cost to the housing market and econ- tion, since Fannie and Freddie already insure Higher loan limits for longer omy of a misjudgment would be high. these loans and are on the hook if they de- Conforming loan limits for Fannie, Freddie fault. HARP refinancing would lower borrow- and the FHA are set to be reduced beginning Principal reduction modifications ers’ monthly mortgage payments, increase this October. The limits were increased during A more dramatic and costly policy step, the chance they will stay current, and thus the recession to help the government fill the but one with the best odds of ending the reduce the payouts on the insurance Fannie void left by the collapsing private lending mar- and Freddie provide. ket.10 The higher limits were never intended to 11 Nearly 100 metro areas, mostly in the Northeast and Cali- Jump-starting HARP could be straightfor- fornia, are considered high-cost. ward. Congress could simply require Fannie 10 The Economic Stimulus Act of February 2008 temporarily raised 12 There is no reason to expect that additional private mort- and Freddie to suspend add-on rates, even the conforming loan limit from $417,000 to as high as $729,750 gage lending can be financed through the private securitiza- for “high-cost areas,” defined as those where the median home tion market. That market is dormant and likely to remain so price exceeds the national average by a substantial margin. Five until housing stabilizes and a range of regulatory, legal and 9 See “Selling Home Affordable Refinance—New Refinance months later in the Housing and Economic Recovery Act, Con- accounting issues are resolved. Options for Existing Fannie Mae Loans.” Fannie Mae An- gress agreed to set a permanent conforming limit of $625,500; 13 The nation’s five largest mortgage lenders account for nearly nouncement 09-04, March 4, 2009. the higher rate is set to fall back to that level in September. two-thirds of mortgage originations.

housing crash quickly and definitively, would This is just about Chart 9: Distress Sales Are High and Rising have the government facilitate loan modi- the number of Foreclosure sale share of home sales fications with substantial principal write- modifications, in ad- 25 Nearly one-fourth of home downs. The current Home Affordable Modi- dition to those that sales are foreclosure sales 20 fication Program (HAMP) was reworked late would take place and another one-tenth of last year to promote this, but the change has regardless, needed sales are short sales. 15 accomplished little so far.14 to forestall the an-

A broader principal reduction program ticipated house price 10 has economic positives and negatives declines.16 Without but would be a positive on net if it were such a plan, the dis- 5 well-designed. The main concerns are tress share of home moral hazard and fairness. To deal with sales is expected to 0 these, the program must be well-targeted, rise from approxi- 06 07 08 09 10 11 Source: Zillow with clearly articulated eligibility require- mately one-third to ments, a long vesting period—as much a peak of 40% late as five years—and some type of clawback this year (see Chart 9). House prices will eral to grow, and local governments rely on provision for future capital gains to guard decline as the distress share of sales rises. property taxes tied to house prices. against potential fraud. But with a well-designed modification a There are some reasons to be optimistic To get a sense of scale, suppose the pro- program implemented in the fall, the dis- that the crash is winding down. House prices gram were to require that, to qualify: tress share of sales will end the year close have fallen far enough that single-family hous- »» Homes had to be owner-occupied. to its current one-third level. ing is affordable and increasingly attractive »» Homes had to have been bought be- Such an effort would not be cheap. A compared with renting. Investors are putting fore December 31, 2008. principal reduction program of this size up cash to purchase distressed properties. »» The owners could take no cash out in would cost an estimated $18 billion. While Overbuilding remains a problem, but a steadily the refinancing. the HAMP and HARP plans will fall well smaller one, given the record-low construction »» First mortgages had to be less than short of using the funds originally allocated and improvement in household formations. conforming loan limits. for them in the Troubled Asset Relief Plan, But this optimism could be easily over- »» A loan’s principal could be reduced by there appears to be little political appetite at whelmed if house price declines reignite a vi- no more than $50,000. this time for putting additional government cious cycle, putting more homeowners under Moreover, refinancing deals would have funds into loan modifications. water, accelerating foreclosures and distress to result in the following conditions: sales, and driving prices even lower. Only an »» The loan could be no more than 10% Conclusions unprecedented monetary and fiscal policy above the home’s market value (to The housing crash and foreclosure cri- response short-circuited that cycle during limit the probability of redefault). sis are not over. Home sales and housing the recession. »» The “front-end” debt-to-income ratio construction are stable but depressed, and Given the balance of risks, policymakers (counting only housing costs) could house prices are falling again. With millions should consider providing additional tempo- not exceed 31%, and the “back-end” of foreclosures and short sales set to hit rary help to the housing and mortgage mar- DTI ratio (counting all obligations) the housing market over the next 12 to 18 kets. Reinvigorating the HARP program and could not exceed 50%. months, prices are set to fall further. delaying planned reductions in conforming Approximately 600,000 current homeown- While house prices are declining, the loan limits would provide a substantial boost ers meet these criteria. Assuming a redefault economy will not flourish. For most Ameri- with no meaningful cost to taxpayers. A rate of 25%, this would result in approximately cans, the home is still the most important well-structured and timely national principal 450,000 sustainable modifications.15 asset, and consumers will be reluctant to reduction program would be a much larger spend while their wealth erodes. Many small- and costlier step but would bring the housing business owners use their homes as collat- downturn to a quick and definite end. 14 To date, there have been fewer than 700,000 permanent HAMP modifications. When the HAMP program was un- None of these policy steps are particularly veiled in early 2009, President Obama predicted between 2 16 Hope Now reports that mortgage loan modification efforts satisfying, but they are worth considering given million and 3 million HAMP modifications. are running close to 1.5 million per year. This includes HAMP that an ongoing housing downturn remains the 15 The redefault rate could be even lower given that this is and increasingly, more importantly, private modifications by comparable to the redefault rate on HAMP modifications. mortgage servicers and banks. most serious threat to the economic expansion.

About the Author

Mark Zandi

Mark Zandi is chief economist of Moody’s Analytics, where he directs research and consulting. Moody’s Analytics, a subsidiary of Moody’s Corporation, is a leading provider of economic research, data and analytical tools. Mark is the author of Financial Shock, an exposé of the financial crisis. His forthcoming book, Paying the Price, provides a roadmap for meeting the nation’s daunting fiscal challenges. He is on the board of directors of The Reinvestment Fund, a Philadelphia non-profit that marries public with private capital to make investments in in- ner cities, and MGIC, a publicly traded firm that is the nation’s largest private mortgage insurer. Dr. Zandi received his PhD at the University of Pennsylvania, where he did his research with Gerard Adams and Nobel laureate Lawrence Klein, and received his B.S. from the Wharton School at the University of Pennsylvania.

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