Treasury plan to help unemployed homeowners is no help at all

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

Readers of the Wisconsin Real Estate Viewpoint will know of our efforts, since early 2009, to think through the best way to tackle the increasing wave of defaults and foreclosures. These foreclosures threaten the fragile stability of house prices, driving them below levels justified by fundamentals—just as circa 2004-2006 a series of bad decisions on financial and regulatory fronts, along with no small amount of "irrational exuberance," drove them above prices justified by fundamentals. In response, we designed something we call the Wisconsin Foreclosure and Unemployment Relief (WI-FUR) plan which provides temporary support to cash-strapped unemployed households to help them stay current on their mortgage.

Let me put a normative statement on the table: in normal times, I would be opposed to a plan like WI-FUR. But these are not normal times: unemployment is still at 10%+, at record duration; a quarter of the nation's mortgages are under water; and house prices are on a knife edge.

If a version of WI-FUR were enacted, some homeowners would be bailed out of bad decisions they made about house purchases and mortgages. More significantly, others would be helped who had made what were, at the time, apparently good decisions; but now they cannot pay previously affordable mortgages; they're unemployed and the value of their homes has fallen below that of their mortgage. (Even if they have positive equity, some unemployed will default because of the income shock, and might end up with a distressed sale rather than a foreclosure; but in today’s environment, large numbers of distressed sales can also lower house prices).

Every foreclosure in today's environment imposes costs on neighbors, the financial system, taxpayers, and the economy as a whole. It's as if houses in our neighborhood have caught fire, some because an irresponsible person was smoking in bed, some because of an unseen short in their electrical system. Before we condemn the smoker, let's put the fire out first before we all burn. (And let's fix the electrical system while we're at it!)

The government’s signature plan to deal with foreclosures is the so-called Home Affordable Mortgage Program (HAMP). Despite $75 billion allocated by Congress to assist up to 4 million distressed households (it was thought), less than 10% of that number of borrowers have received permanent loan modifications so far; and those modified loans are, after the fact, still defaulting at high rates. Some experts predict that up to 2/3 of modified loans will, in fact, default.

HAMP's ineffectiveness is by now well known; see, for example, the July 21, 2010 quarterly report to Congress by SIGTARP (Special Inspector General for the Troubled Asset Relief Program)'s Neil Barofsky; pages 5-7 of the executive summary give an overview. Or see the Government Accountability Office report Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs.

The WI-FUR plan, and complementary plans put forward by our colleagues at the Boston Fed and elsewhere in the Fed system, argue for temporary housing vouchers (or loans) aimed at the unemployed, who have become the majority of foreclosures and who are often effectively (if not "de jure") ineligible for assistance through normal HAMP channels.

Recently our friend Karen Rivedal, who writes the Wisconsin State Journal's real estate blog Property Trax, asked me to comment on a recent variant of the HAMP program called Home Affordable Unemployment Program, or HAUP.

When I first heard of HAUP, I was excited, but my excitement quickly turned to disappointment. Among other problems, it requires that unemployed homeowners go through a fairly bureaucratic procedure to apply for what is (more or less) three months forbearance. And that' s merely the application; forbearance may or may not be granted for the 3 months. Remember, at the present time, the AVERAGE duration of unemployment is 9 months and rising.

(The fine print says you can extend beyond 3 months, but it's not clear that will happen, and will certainly not be clear to potential applicants).

The website's FAQs does not even tell people if the differences between the original payments and the reduced payments, are forgiven, or wrapped into the loan. (When I inquired of the experts in Washington, it turns out part of the loan is forborne, adding to the loan amount, but it’s amazing that they ask people to apply without clearly explaining such a key element of the program!)

What if your unemployment lasts more than three months (which is true for most unemployed today?) After two months you are given an application for HAMP, the dog that won't hunt. As far as I can tell, most unemployed will still not qualify for HAMP after they fill out this application.

There are other details that limit the program’s scope, and hence its effectiveness at halting the skid in housing prices. Homeowners can't get relief on the second liens. And if I read it right, HAUP does nothing for the unemployed not receiving unemployment insurance.

My bottom line: Treasury is still spitting on the fire and leaving the hoses coiled up.

Bobos in Paradise

By Stephen Malpezzi, Professor and Lorin & Marjorie Tiefenthaler Distinguished Chair of Real Estate

Whatever your politics, discerning readers of the op-ed columns recognize center-right columnist David Brooks as one of the very best at his craft. Trained as a journalist but knowledgeable about a range of social sciences, his book Bobos in Paradise gave a popular introduction to “bourgeois bohemians,” a word Brooks coined to describe the nineties version of earlier “yuppies:” upper-class, educated, and ready to spend, but on goods (argues Brooks) like granite countertops or high-end electronics that are positioned as functional, rather than something expensive but frivolous from the Neiman-Marcus Christmas catalog. (Colleague David Shulman recommended the book to me, and it makes my Reading for Life list.)

Brooks has written two recent columns that speak to me as we prepare for the year’s classes and an influx of students. The first column appeared in The New York Times on July 9th (“The Medium Is the Medium”). In it, Brooks nods to the many benefits of the Internet, email and the rise of social media, but he also makes a pitch for the importance of old-fashioned books. Readers of my introduction to Reading for Life will know this is a position I’ve staked out as well. Research by Jacob Vigdor and Helen Ladd, cited by Brooks, is the most comprehensive study I’ve ever seen on the impact of personal computers on student achievement. This study, “Scaling the Digital Divide: Home Computer Technology and Student Achievement,” is still in working paper form but is destined to become a classic (I’ll address it more fully in a future entry). The take-away for the moment is this: simply providing your child a PC and an Internet connection is no guarantee that they’ll excel in school; in fact it may bring their performance down. Books, on the other hand, rule.

The other recent Brooks column that speaks to our educational mission is the July 13th “An Economy of Grinds.” Brooks describes “princes” as business people, often those at the top, who have great social skills, including an ability to integrate and “tell a story” about a situation. “Grinds,” on the other hand, are driven loners, often almost anti-social, ready to take a contrarian view. Both can be arrogant, but the grinds, while not always obvious about it, are often really arrogant. Citigroup’s Charles Prince (he’s even got the name!), “as long as the music’s playing, you’ve got to get up and dance,” versus Michael Barry, one of the first to get the MBS market right, rarely left his office and took poor investor relations to a new level.

But really, Brooks is not completely fair to either grinds or princes. The best business leaders combine both. Think Jack Welch, not Alec Baldwin’s Jack Donaghy on 30 Rock. Or think of our own James Graaskamp’s oft-quoted statement that a UW grad should be a combination of da Vinci, Muir and Rouse.

At Wisconsin, our goal should be to turn out grinds who can tell a story, princes who aren’t in thrall to the latest investment fad. Our students and alums need to think independently but be able to communicate—both up and down the food chain!—inspire and persuade. In future posts, we’ll talk about some of the hard and soft skills we all need to master throughout a lifetime of learning.

“The result [of an academic program] should be a real estate entrepreneur with the creativity of Leonardo da Vinci, the sensitivity for the natural world of John Muir and the political humanity with cash management for profit of James Rouse.”
James A. Graaskamp (1933-1988), professor and chair of the UW-Madison Department of Real Estate and Urban Land Economics

What I did on my summer vacation

What did you do during your summer vacation? For students, it’s a question asked when they go back to school in the fall. It may include internships or project work as well as some fun in the sun. But what are our faculty doing during the summer break?

Wisconsin real estate faculty and staff spend some of their time at the Graaskamp Center doing the usual things they do during the school year—maintaining the website (including this blog!), tracking budgets, freshening up teaching materials and working on research. But summer is also a time to undertake some special activities that they may not have time for during the tightly scheduled fall and spring semesters.

Today we start a series in which we’ll talk to faculty members about what they are doing during their summer “vacation.” Graaskamp Center Academic Director Stephen Malpezzi just returned from two weeks in Europe, first in St. Andrews, Scotland, then in Istanbul. Steve talked about the trip with Kris Hammargren, Senior Associate Director at the Graaskamp Center.

Kris Hammargren: So you were in St. Andrews for the last week of June. Were you trying to qualify for the British Open?

Stephen Malpezzi: No, I haven’t played golf for 20 years, and that’s good for the game! St. Andrews has a dozen beautiful courses in addition to the famous old course, and I do my part by keeping them open for real golfers.

KH: OK, why were you there really?

SM: I was invited to visit the University of St. Andrews by my friend Duncan Maclennan, one of Europe’s leading housing economists. We’ve worked together off and on for the better part of three decades. [See "The Price Elasticity of Supply of New Residential Construction in the United States and the United Kingdom (with Duncan Maclennan)." Journal of Housing Economics, 10 (3), September 2001, pp. 278-306.]

KH: So what specifically does a week in St. Andrews entail?

SM: The mix is a little different each time. I made a presentation to the faculty of the Centre for Housing Research to bring them up to speed on the latest developments in U.S. housing and financial markets, including the foreclosure problem. Then, I sat down with some of the Centre’s faculty and gave them comments on some of their research, such as some new work on spatial patterns of Spanish house prices by Arnab Bhattacharjee undertaken with his colleagues Eduardo Anselmo de Castro and João Lourenço Marques. Duncan and I followed up on our participation in last year’s conference on U.K. housing policy (Building and Social Housing Foundation (BSHF) conference at St George's House in Windsor Castle and chaired by Lord Richard Best); in particular we sketched out a cooperative study of European housing supply that we think can help inform the debate on the reform of planning systems. I also had some time to program the data analysis for a new paper on U.S. housing prices I’m writing with one of the top graduates of our PhD program Yongping Liang.

KH: Sounds like you were busy!

SM: Yes, but I make time for some walks around St. Andrews too—it’s Scotland’s first university, founded in 1413, and in a beautiful town. I visited Duncan’s family in the small town of St. Monans, watched a little World Cup and enjoyed some fine local seafood. Then it was off to Istanbul.

KH: Thanks, Steve. As you can see, our faculty are busy with a number of projects this summer. We’ll talk to Steve again about his visit to Istanbul, plus some of the summer activities of other faculty members, in forthcoming posts.

Photo by Stu Smith via Flickr

How do you stay cool?

High temperatures are predicted for much of the U.S. today--even Madison is expecting heat and humidity--and everyone is looking to stay cool.

As I reflected on ways to beat the heat, I realized that managing hot weather has always been a challenge, particularly in the days before our modern conveniences. This led me to Wikipedia where there is a fascinating history of air conditioning going back to early Chinese dynasties and ancient Rome. Modern methods for air cooling using CFCs were developed in the early 20th century which are now giving way to non-ozone depleting refrigerants.

Today, while air conditioning equipment is widespread and has improved the quality of life in hot climates in the south and western United States, it is not ubiquitous. Over the holiday weekend, I spent some time in Duluth, Minnesota where I grew up, at my parents' house which does not have air conditioning. And for Duluth's usually mild summer temperatures (and famously cold winter temps!), it's not really justified. However on this hot and sticky weekend, it left us trying to stay cool some old fashioned ways like seeking shade, drinking something cool and heading to the lakeshore for a dip in Lake Superior's chilly 60-some degree water.

I'd love to hear about your experiences with air conditioning--did you have it growing up? Do you have it now? Where are you in the country (or world)? Please share with us in the comments below.

And while you're thinking these thoughts about cooling, think about your friends and neighbors too who may need some help staying cool today.

Photo by Steve Moses via Flickr

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