Scott Van Voorhis
Economic inequality is one of President Barack Obama’s favorite subjects to opine about.
But the Obama Administration’s lame and limp-as-wilted-lettuce approach to righting the wrongs of a messed-up housing market has only helped to widen the gap between the wealthy and everyone else.
And nowhere else is this more true than Greater Boston, where sky-high real estate prices and a luxury housing boom have helped create one of the biggest chasms in the country between the wealthy and the middle class and poor.
A key example of an Obama era housing initiative that didn’t go far enough can be found via a new study by an assistant professor at Harvard Business School and his two co-authors from the University of California Berkeley.
The study takes a close look at quantitative easing, or QE, for short, the Federal Reserve’s $3 trillion-plus effort to drive down interest rates and stabilize the reeling housing market.
The Fed kicked its asset buying off in late 2008 and kept at it, over three incarnations, through 2014. And while Obama, as with all presidents, doesn’t control the Fed, it was a policy he certainly backed.
With QE1, the Fed began snapping up $1.25 trillion in mortgage-backed securities and $300 billion in treasury bonds in late 2008. The central bank followed that over the next five to six years with two more big doses of QE, buying $1.7 trillion in mortgage-backed securities and treasury bonds.
What Might Have Been
On the face of it, the Fed’s experiment with quantitative easing looks like an unalloyed success.
The Fed’s first wave of QE lowered rates and led to $600 billion in mortgage refinancing while boosting spending by homeowners on everything from cars to meals out by $76 billion, all at a time when the economy definitely needed the boost, according to the wonky sounding Harvard/Berkeley study, “How Quantitative Easing Works: Evidence on the Refinancing Channel.”
However, even as the Fed was frantically hurling buckets of cash at the housing market, money was spilling out of a big hole in the bottom. The dollars were going mainly to homeowners who were in relatively good shape, while their foreclosure-ridden brethren in some of the nation’s hardest-hit housing markets were left to sink.
Longstanding government rules allowed the Fed to buy only mortgage-backed securities filled with conforming loans. These have fairly tough guidelines for borrowers to meet, including at least 20 percent equity in the house or condo relative to its value and a strong credit rating as well, the study notes.
But non-conforming loans – mortgages where there may be only 10 percent equity – were off the table. As a result, rates fell for conforming mortgages, but not for somewhat riskier nonconforming loans, which the Fed was barred from buying.
Homeowners who could meet the criteria needed to qualify for a conforming loan – maybe having a little cash in the bank or lucky enough to be living in a city where home prices were holding up better – made out like bandits, refinancing at historically low rates.
By contrast, others who had the misfortune of owning a home in a market where values were underwater, or whose credit scores took a ding during the recession, were locked out of the big refi party.
It need not have worked this way. The study by Marco Di Maggio, the assistant HBS prof, and his two Berkeley colleagues from the Haas School of Business, finds that making a simple adjustment – lowering the equity threshold on mortgages the Fed can buy from 20 percent down to 10 percent – would have spurred an additional $92 billion in refinancing by homeowners hardest hit by the downturn.
That would have given a desperately needed boost to an additional 410,000 homeowners and headed off who knows how many foreclosures. It would have also freed up another $10 billion in equity cashed out that could have helped many families in tight spots following the downturn pay their bills, the study finds.
“The unfortunate flipside is that QE was of much less help to the millions of homeowners who lived in areas where the steep crash in house prices left them underwater, unemployed or with damaged credit,” Di Maggio told Working Knowledge, Harvard Business School’s research newsletter. “Borrowers in distressed areas tended not to qualify for the strict guidelines of conforming loans.”
Consequences Of Inaction
Sadly, this very big missed opportunity was no one-off for the Obama Administration.
A president known for his grand, sweeping speeches opted to muddle through the housing crisis with an incremental approach that steered clear of any grand initiatives. He opted to work with the banks that helped create the mess in the first place, through the Home Affordable Modification and Home Affordable Refinance programs. The two programs quickly degenerated into bureaucratic nightmare.
Less than a million homeowners managed to get loan modifications during the Obama years. By comparison, more than 9 million people were forced out of their homes through foreclosures and other boom-lowering by the banks.
Of course, if Obama and the Fed had been a little savvier about the trillions spent on quantitative easing, maybe that brutal number might have been somewhat lower. Surely there would have been fewer homes lost and lives shattered.
Who knows, maybe there would have been a little less of the desperate rage and anger that manifested itself on Election Day, sending Donald Trump to the White House. The Center for American Progress, a liberal think tank, recently reported that counties with higher rates of underwater homes were also more likely to have voted Republican, according to Quartz.
Unfortunately, what’s done can’t be undone. And we will be paying the consequences of Obama whiffing on the housing crisis for years to come.
