The foreclosure crisis is over, for now; Obama’s relief programs hurt more than they helped

With the housing market steaming ahead like the housing bubble never happened, it’s easy to forget that about 7 million Americans lost their home during the recession. And I think it’s easy to forget what I believe was the biggest failure of the Obama administration.  While banks got bailouts, homeowners got kicked out. Legislation passed in panic during the collapse (The Emergency Economic Stabilization Act of 2008) made it through Congress only after assurances that homeowner rescue  would be baked into the law.  Critically, that was meant to include an ability for judges to shrink the principal owed on homes that could no longer support the size of the pre-bubble mortgage, a provision known as a cramdown.  That never happened.

Instead, Americans got messy programs like HAMP and HARP.  These faux-market solutions — banks got bonus payments for doing loan modifications — came with massive red tape. In the end, it was easy for banks to obfuscate and stall, torturing mortgage payers who desperately needed relief.  The programs were supposed to help 5 million families; only about 1 million ended up with HAMP/HARP loan modifications  Lawsuits are still pending.

I don’t believe the administration had been forced to answer for this, largely because a majority of Americans have now recovered from the housing crash.  But the millions who unnecessarily lost their homes, and the millions more who were subject to nightmarish paperwork ordeals, deserve answers.

For a great explanation of why HAMP/HARP were programs designed for banks, not people, read this piece.

I bring all this up now because recent data suggest that America has finally fully recovered from the housing bubble and collapse.  Foreclosures are now back to pre-crash level. So I examined that data in a recent piece for Credit.com, and the results were a surprise.  Government foreclosure help was both too little and too big, the data suggests.  The middling efforts probably prolonged the pain of the recession for everyone.  Here’s the piece, which originally appeared on Credit.com:

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It took nearly a decade, but the foreclosure crisis created by the housing bubble seems to have finally receded. ATTOM Data Solutions, which gathers information on housing trends, reported that default notices, auctions and bank repossessions fell 24% in September, compared to a year ago. Essentially, that means foreclosures are down to their lowest levels since 2005, before the bubble burst.

“Foreclosure activity has been on a steady slide downward over the past six years, finally dropping back below pre-crisis levels in September,” Daren Blomquist, senior vice president at ATTOM Data Solutions, said, proclaiming the results provide the “nail in the coffin” of the foreclosure crisis.

The timing is probably good for Democrats, as the Obama administration’s program to help Americans facing foreclosure — the Home Affordability Modification Program (HAMP) — was criticized for not helping enough at-risk homeowners. In its first five years, HAMP was supposed to help 3 to 4 million homeowners — but only about 1 million modifications were completed by then. Meanwhile, an estimated 7 million people lost their homes during the recession.

Data crunched by ATTOM at Credit.com’s request raises another potential question regarding HAMP and other efforts to help struggling homeowners: did these programs prolong the recession?

Bloomquist examined five states where banks had an easier time completing foreclosures — we’ll call these the “pull-off-the-band-aid” states — and five other states called “foreclosure prevention states,” where legislation and court proceedings were designed to slow down the foreclosure process.

The results are telling. In the five “pull-off-the-band-aid” states, housing prices are up dramatically from 2008 — an average of 33%. Those states are Arizona (up 10%), California (34%), Colorado (50%), Georgia (26%) and Michigan (44%).

On the other hand, the housing recovery is much slower in the “foreclosure prevention” states. As a group, housing values in those five places are only now besting 2008 levels. They are Florida (up 8%), Illinois (up 1%), Nevada (up 6%), New Jersey (down 11%) and Ohio (up 16%).

Four of those five states are “judicial foreclosure” states, meaning a judge must review each case, which typically slows down the process. Nevada, the exception, passed laws requiring mediation in the foreclosure process, as did several other legislatures in this group. The sluggish recovery in those five states is also apparent from the share of seriously underwater homes. In them, 19% of homeowners owe at least 125% more on their mortgage than their home’s value.

Among that group, Ohio’s property values have risen the most, but 21% of mortgage holders there are still seriously underwater. Standing in contrast, in the “pull-off-the-band-aid” states, the seriously underwater share is 11%.

Bloomquist said the data suggests government foreclosure intervention efforts in the housing crisis failed on both sides.

“Not only did they not do as much good as promised, they actually did some harm in prolonging the pain,” he said. “This harmful effect was multiplied in states with aggressive foreclosure prevention efforts added on to the federal programs. On the other hand, several hard-hit states that did not add many or any additional foreclosure prevention programs on top of the federal government programs have recovered most quickly in terms of foreclosure numbers getting back to pre-recession norms and home prices recovering.”

The data can’t say definitively that slowing down foreclosures during the recession hindered the housing market recovery in those states. But Bloomquist thinks the data is strong enough that it merits consideration by policymakers.

“Yes, there are other factors at work helping to lift the real estate markets in places like Colorado and Georgia, and even Arizona and California,” Bloomquist said. “However, Michigan does not have the favorable demographic trends in place, and Florida on the other side do have more favorable demographic trends. I think juxtaposing specifically Michigan and Ohio and also Arizona and Nevada provides a pretty clear difference between two sets of similar markets.”

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