Zandi believes that in the long run, less government involvement in mortgages could be a good thing, but that the already-fragile housing market is not ready for the government to substantially reduce its influence. "I don't think that [decreased loan limits are] a bad idea, longer-run. In fact, it's a good way to try to get the government out of mortgage market, at least to start extricating itself from the mortgage market," says Zandi. "But it's probably premature to do that on October 1."
Don't HAMP-er the Recovery
The Home Affordable Modification Program, better known as HAMP, was established a part of the larger Troubled Asset Relief Program, or TARP. It was designed to help struggling homeowners modify their loans to be affordable. "HAMP has been a badly designed program, badly executed," says Stephen Malpezzi, professor of real estate at the University of Wisconsin. That sentiment was reflected in a report that the special inspector general for TARP presented to Congress in April. The report characterized HAMP as "beset by problems from the outset," many caused by mortgage servicers with "extraordinarily poor" performances in areas like evaluating which homeowners meet income requirements. Last week, the Treasury found Bank of America, J.P. Morgan Chase, and Wells Fargo to be in need of "substantial improvement" in their handling of HAMP modifications. As a result, the Treasury announced that it would withhold incentive payments to those banks until their performances improved. Meanwhile, homeowners seeking loan modifications must wait.
HAMP has long been criticized by economists and politicians alike. In March, the Republican-led House voted 252-170 on a bill to eliminate it.
Malpezzi is one proponent of ending HAMP. In its place, he advocates a program combining unemployment insurance and a temporary housing voucher program. He believes that such an initiative would cover those who HAMP has failed to help: unemployed people with mortgage problems. "For much of the last two years, the majority of foreclosures have been due to people who have reasonable mortgages but are unemployed," says Malpezzi. "HAMP simply doesn't work for the unemployed." He argues that unemployment insurance checks are rarely large enough to allow homeowners to both pay their mortgages and purchase basic necessities like food and transportation. Vouchers, then, would help homeowners to remain afloat financially while maintaining their mortgage payments. [See five reasons to be optimistic about the U.S. economy.]
Since the government gave billions of dollars to troubled financial institutions in 2008, "bailout" has become a dirty word in American politics. This fix involves bailouts not to large financial institutions, however, but rather to troubled homeowners. As early as 2008, Shiller advocated bailing out low-income victims of subprime lenders. Shiller admits that bailouts are not a palatable option: "Bailouts are not an ideal solution. They seem unfair. They are, in some sense, unfair. You are rewarding the people who took reckless risks in the housing market." However, he also believes that the continued housing crisis is deep enough to warrant such action.
Zandi specifically proposes expanding home-loan modification efforts to modify the principal amounts that some homeowners owe. He explains that reducing principal amounts for homeowners who are underwater could "give them a stake in their home again so they don't default." However, he recognizes that identifying homeowners who would be good candidates for such modifications would be difficult. [Read the U.S. News debate: Should congress raise the debt ceiling?]
Look to the Future
Creating a lasting recovery means learning from the mistakes of the housing collapse so that the country can avoid future crises. "The mentality of most people in confronting a crisis is to view it as just 'this crisis,'" says Shiller. "So we're in a ship that's damaged and may be sinking, so we're just thinking of anything to do to stop from sinking. But we should also be thinking about building better ships."