Home ownership has been the keystone of the American Dream. If you think about the American Dream as upward mobility – as being able to progress and prosper in your life and go as far as your talent and hard work can take you – owning your own home isn’t just the goal, but the mechanism to achieve it.
When you own a home, the cost of shelter actually reduces over time because your income likely improves and the mortgage payment (assuming it is fixed) becomes less relative to inflation.
But when you rent, what you pay for shelter rises at least as much as inflation – you can never get ahead, begin to have extra money to pay for education, for example.
While home owners contribute to making a community stable, and have a stake in their neighborhood, renters move, do not have roots (and likely vote in less proportion than home owners, are harder to register and easier to challenge).
We can see the interplay between home ownership and the American Dream in the Homestead Act, passed by Congress on May 20, 1862 – 150 years ago.
The Homestead Act promised 160 western acres to each settler who agreed to cultivate them for five years. Eligibility was limited to citizens (or prospective citizens) 21 and older who had never fought the government (thus excluding Confederate soldiers and former soldiers). Even women and minorities could claim land a first – which set the stage for a new discussion of the meaning of the rhetoric contained in the Bill of Rights.
So great was the demand, that the United States handed over 10 percent of its lands 270 million acres to private citizens. (To mark the anniversary, the National Wildlife Refuge System issued a list of historic homesteads you can visit, in order to be reminded and perhaps rekindle, that pioneering spirit.)
Home ownership was also the essence of George W. Bush’s economic policy – that is, he used record rates of home ownership, 69 percent in 2004, as his proof that his policy of cutting taxes and muzzling regulators while waging two wars was a great course of action. He had nothing else to show for it – the economy was already retrenching and jobs were being shed each month by the tens of thousands – and finally hundreds of thousands – by the time he vacated the White House.
Now Republicans have changed their tune: they think that a Renter Society is just fine. In fact, Romney’s solution to the housing crisis, when homeowners were being foreclosed even by fraudulent means by the millions, was just to let the “market” run full course, allow housing values to plummet, until an investor (speculator) would come in and buy up the properties and rent them back.
In a recent report, Oliver Chang, an analyst at Morgan Stanley, dubbed 2012 “The Year of the Landlord.”
Well, that has not been President Obama’s approach to the housing crisis. He has taken measures twice so far to make it easier for homeowners to forestall foreclosure and refinance.
But the ones who were left out were homeowners who did everything right – paid their mortgages dutifully, even though they were paying at rates of 6 percent, 7 percent, or 8 percent, when the banks are getting their funds for practically free from the government (taxpayers).
Such homeowners are barred from refinancing because, due to no fault of their own, housing values may have fallen so that the house is worth less than the amount of the outstanding mortgage (actually, the house has to be worth 20 percent more than the amount of outstanding mortgage, according to Irina Pashinsky, Home Mortgage Consultant for First Allied Home Mortgage, which works with Laffey Fine Homes in Great Neck).
Some people in Great Neck have been told that if they want to force their bank to modify their loan, that they should withhold payment, go into arrears, “that will get their attention.”
That is a completely wrong, because it that will destroy your credit, amass penalties, and make it nearly impossible to actually refinance.
“Do not listen to anybody – attorney or bank representative – who is telling you to be late on mortgage to be able to take advantage of loan modification, because if it doesn’t happen, you will be in big trouble to refinance. You will have to wait a long time,” Pashinsky counsels.
So far, the Obama Administration’s efforts to help homeowners avert foreclosure have done little for those who have been doing everything right, but were barred from refinancing in order to benefit from the low interest rates.
Now, President Obama is calling on Congress to adopt three provisions to make refinancing available to an estimated 3.2 million homeowners – that is, responsible homeowners who have been paying their mortgage but unable to take advantage of the historically low interest rates. This would benefit homeowners in our neighborhood, as well as bring real relief to other communities like Uniondale and Hempstead which have been devastated by the housing crisis, and overall, stimulate the economy and jobs creation.
Here are the essentials of what Obama seeks to do:
1. Remove the final barriers for borrowers with GSE insured loans: Commonsense reforms that come at no cost to taxpayers and would apply to approximately 12 million borrowers, unlocking competition between banks for borrowers’ refinancing business and eliminating fees and appraisal costs. These steps will increase the number of families who can save on average $3000 a year by refinancing. (GSE refers to government–sponsored enterprise, such as Fannie Mae and Freddie Mac.)
Cut red tape: Some borrowers still need manual appraisals to determine if they are eligible for refinancing, which can take lots of time and cost up to $1,000. Under the President’s plan, the GSEs would be directed to expand their automated valuation processes, eliminating a significant barrier that will reduce cost and time for borrowers and lenders alike.
Increase competition so borrowers get the best possible deal: Today, lenders looking to compete with the current servicer of a borrower’s loan for that borrower’s refinancing business continue to face barriers to participating in HARP (Home Affordable Refinance Program). This lack of competition means higher prices and less favorable terms for the borrower. The President’s plan would extend the same streamlined underwriting currently enjoyed by the borrower’s existing lender to the rest of the market, leveling the playing field and unlocking competition between banks for borrowers’ business.
Extend streamlined refinancing for all GSE borrowers: The president’s plan would finally extend these steps to streamline refinancing for homeowners to all GSE borrowers. Those who have significant equity in their home – and thus present less credit risk – should benefit fully from all streamlining, including lower fees and fewer barriers. This will allow more borrowers to take advantage of a program that provides low-hassle, low-cost access to today’s low interest rates – and make it easier and more automatic for servicers to market and promote this program for all GSE borrowers.
2. Provide simple, low-cost refinancing opportunities for non-GSE borrowers: The president’s proposal would also extend access to streamlined refinancing for borrowers who’ve been paying their mortgages on time to those who currently do not have a loan backed by the GSEs to FHA. This would be run through the FHA and open up today’s low rates to another 3-4 million families.
Open to borrowers who are current on their mortgages: The refinancing program will be open to all non-GSE, non-FHA borrowers with standard loans who are current on their mortgage, meet a minimum credit score, meet FHA loan limits [$729,750], and live in a single-family home that they own.
Streamlined process: Borrowers will apply through a streamlined process designed to make it simpler and less expensive for borrowers and lenders to refinance.
Example of how this works: A borrower has a non-GSE mortgage originated in 2005 with a 6 percent rate and an initial balance of $300,000 – resulting in monthly payments of about $1,800. The outstanding balance is now about $272,000 and the borrower’s home is now worth $225,000, leaving the borrower underwater (with a loan-to-value ratio of about 120%). Though the borrower has been paying his mortgage on time, he cannot refinance at today’s historically low rates. Under the President’s legislative plan, the borrower would be eligible to refinance into a 4.25% percent 30-year loan, which would reduce monthly payments by about $460 a month.
3. Give borrowers an incentive to rebuild equity in their homes: All underwater borrowers who decide to refinance will have a choice: they can take the benefit of the reduced interest rate in the form of lower monthly payments, or they can apply that savings to rebuilding equity in their homes. The latter course will give the majority of underwater borrowers the chance to get back above water in five years or less.
Covered closing costs: To encourage borrowers to make the decision to rebuild equity in their homes, we are proposing that legislation that would cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner.
Example of how this works: A borrower has a 5.5 percent $216,000 30-year mortgage originated in early 2007. The loan now has an outstanding balance of $200,000, but the house is worth $167,000 (a loan-to-value ratio of 120%). The monthly payment on this mortgage is $1,228. While this homeowner is responsibly paying her monthly mortgage, she is locked out of refinancing. By refinancing into a 4.0 percent 20-year mortgage loan, this borrower keeps her monthly payments effectively the same. After five years her mortgage balance would decline to $165,000, bringing the homeowner above water.
Making refinancing easier could provide an average of $2500 to $3000 in savings – about $250 a month – to households, which could unleash about $100 billion in consumer demand, which in turn would promote hiring of hundreds of thousands of workers, and send the economy spiraling to growth.
The amounts would be much greater for Great Neck, where the average home price is $800,000.
Here on Long Island, the granddaddy of Suburbia and suburban lifestyle, we know how home ownership drives demand – you only have to visit Roosevelt Field and the Miracle Mile to appreciate how integral to our regional economy home ownership is. Nassau County derives 39% of its revenue from sales taxes.
We all benefit because it would unblock the logjam on consumer demand that will spur consumer spending and jobs creation.
But there is only so much Obama can do with his own executive authority, as he has already done under the banner “We Can’t Wait.” Now he is going to Congress with a five-point “To Do List” – this relief for homeowners is #2 on the five-point item, right after “Reward American Jobs, Eliminate Tax Incentives To Ship Jobs Overseas;” and ahead of “Invest in a New Hire Tax Credit For Small Businesses” (Congress needs to invest in small businesses and jump start new hiring by passing legislation that gives a 10 percent income tax credit for firms that create new jobs or increase wages in 2012 and that extends 100 percent expensing in 2012 for all businesses; “Create Jobs By Investing In Affordable Clean Energy” (Congress needs to help put America in control of its energy future by passing legislation that will extend the Production Tax Credit to support American jobs and manufacturing alongside an expansion of the 30 percent tax credit to investments in clean energy manufacturing); and “Put Returning Veterans to Work Using Skills Developed in the Military.”
But when you have one party who needs the misery index being high in order to reclaim power (you could hear Romney’s gleeful chortles when the May jobs number came in as an anemic 69,000), it is unlikely that any of these provisions will be embraced by the Republicans.
Indeed, John Boehner is already threatening a repeat of last summer brinksmanship in let the US default rather than raise the debt ceiling – just the whisper of it is enough to accomplish the Republicans’ aim of stalling the economic recovery as it did last year when it also resulted in credit agencies downgrading the nation’s stellar rating for the first time in history). I mean, this is a Congress which is refusing to stop the interest rate on student loans from doubling, so you know that the Republicans will not do anything to give relief to homeowners.
But people should know that there are solutions to our problems which do not entail slashing Social Security, privatizing Medicare, stripping public workers of their pensions, and letting bridges and tunnels and water treatment plants crumble.
Think about what an extra several hundred dollars a month ,several thousand dollars a year, would do for your family. Why shouldn’t responsible homeowners have the benefit of historically low interest rates? Think about the extra security that families and whole neighborhoods would have.
Home ownership is an essential component of the American Dream.
The alternative, dystopian, vision as manifest by the Mitt Romney/Paul Ryan crowd is a Serf Society.
