Q&A: What housing policy and the mortgage crisis mean to Ohio
Dr. Stephanie Moulton, assistant professor, John Glenn School of Public Affairs
1. What are the primary housing issues facing Ohio as a result of the recent mortgage crisis?
We can think about two broad issues facing Ohio as a result of the recent mortgage crisis: stabilization and prevention. First, we need to stabilize the current housing market and address the needs of current homeowners who may be in foreclosure or at risk of mortgage default and foreclosure. Second, we need to formulate more sustainable strategies for homeownership moving forward, particularly for low and moderate income households who are potentially more vulnerable to economic shocks. Both of these issues are complex and require the collaboration of public and private actors at the national, state and local levels. Both are equally important to the future health of the housing market in Ohio and the viability of Ohio neighborhoods. There is a lot of focus, understandably, on stemming the foreclosure crisis. This makes sense- when a patient arrives in the Emergency Room in critical condition, the first challenge is stabilization. However, there must be a simultaneous focus on diagnosing and addressing the “causal agent”, or any treatment is not likely to succeed long term. This is the dual challenge facing Ohio- addressing the needs of current homeowners in distress, while simultaneously identifying systemic changes to prevent future distress for new (or currently healthy) homeowners.
2. There is a lot of discussion about rising foreclosures nationwide, but much of the focus has been on states with previously “hot” markets like California and Florida. How does the foreclosure problem in Ohio differ from these other states?
It is true that the foreclosure situation in Ohio is very different from the foreclosure situation in markets like California and Florida. As of September 2010, Nevada, Arizona, Florida and California occupy the “top” ranked positions in terms of number of foreclosures per household. Ohio’s foreclosure problem has been growing steadily for the last 14 years due to ongoing economic and mortgage factors; by contrast, states with previously booming markets are experiencing record declines in housing values, leading to record high incidences of foreclosures in the past 2-3 years. This by no means that Ohio’s problem is not as bad; in fact, due to the chronic nature of the problem, interventions are likely more complex and long-term. And, prevention becomes imperative to stop the continued growth trend that was in place even prior to the mortgage market crash.
For the previous decade prior to 2007, Ohio consistently ranked among the top three states in the nation in foreclosure, along with Michigan, Indiana and Wisconsin. These Midwestern states have been hit particularly hard economically over the past 15 years, leading to reduction in income and increasing unemployment, particularly for low and moderate income households. Further, the creative mortgage products that largely developed in response to record high housing values in other parts of the country (such as interest only mortgages, adjustable rate mortgages with low introductory “teaser” rates that increase after 5 years, and mortgages with high fees and penalties), also became widespread throughout the Midwest- but without the booming housing market to support these higher risk products. Ohio homebuyers with these products often found them unaffordable, even within the first year after home purchase, leading to mortgage defaults and foreclosures (long before the crash of 2007).
Given the combination of ongoing economic hardship and risky mortgage products, Ohio experienced rapid increases in foreclosures beginning in the mid 1990s. In fact, Ohio was frequently the target of housing research on mortgage foreclosures prior to the current crisis; many of the lessons that the nation is now learning from the mortgage crisis are being drawn from experiences in states like Ohio over the past decade. However, there are limits to the comparability of lessons and interventions across different housing markets, and different geographic regions in the country.
3. There are a lot of different approaches being discussed right now to address foreclosure problems. What are the best options to address the problems in Ohio?
Before discussing the “best approaches,” it is important to unpack the causes of foreclosures. Foreclosures typically occur when homeowners can no longer afford their monthly mortgage payment and/or they cannot sell their home for as much or more than they owe on their home. These two often go hand in hand; but not necessarily. For example, if a homeowner can no longer afford their monthly mortgage payment, but they can sell their home for as much or more than they owe on their home, there is no reason for foreclosure. They will be able to sell their (too expensive) home, and rent or buy a more affordable home. When this process breaks down, there are two important components to unpack: (1) the reasons for the unaffordable mortgage payments; and (2) the reason that the homeowner cannot sell their home for the amount that they owe.
Affordable mortgage payments are typically defined as no more than 29-31 percent of a gross monthly income. So, for a household with a monthly income of $2,000, they should spend no more than $600 per month on housing costs (for a mortgage, this includes principal, interest, taxes and insurance). Homeowners may find themselves in a situation where they pay more than an affordable monthly amount for their mortgage due to an increase in the cost of their mortgage (i.e., an increase in the interest rate on the loan), or due to a decrease in their monthly income. If due to an increase in mortgage costs, then a loan modification that lowers the monthly payment (by lowering the interest rate) might be the best option. However, if due to temporary loss of income, then some form of temporary mortgage payment assistance (assistance to help make the monthly payment for a specified period of time) might be the best approach.
Aside from payment affordability, it is important to keep in mind the reason that the homeowner is unable (or unwilling) to sell their home. In states like California, Nevada and Florida, home values overall have declined by as much as 50-100 percent in some areas; thus, it is nearly impossible for most homeowners (even those with substantial equity) to sell their homes and payoff their current mortgages. In Ohio, it is not uncommon for homeowners to find themselves “underwater”, but the severity of this is often much lower than in other regions of the country. Therefore, principal reduction, where the amount owed on the home is reduced by the lender or through external assistance, may be a viable option. It is also important to assess the willingness of the homeowner to stay in the home. When a combination of factors are present (the homeowner cannot afford the monthly payment long term, and they owe more than the house is worth), then the homeowner may be best assisted by options that allow them to exit homeownership without foreclosure, such as deed in lieu of foreclosures or short sale.
Not getting to the underlying problem before proposing solutions increases the likelihood of the borrower re-defaulting down the line (which does nothing to address the foreclosure problem). Thus, programs that consider all options simultaneously, rather than one in isolation, are critical. One example of such a program is Ohio Housing Finance Agency’s recently launched Hardest Hit Fund (HHF) Program. Ohio was one of the first 10 states in the nation to receive a special allocation of TARP funds from the Federal government to address foreclosure problems in the state. Ohio’s HHF program combines all four of the strategies described above (loan modification, temporary payment assistance, principal reduction, and graceful exit), intentionally designed to find the best approach to address the underlying causes of foreclosure on a case by case basis.
4. It is often said that one of the primary reasons for this crisis was that homeownership was pushed too far in this country, and that government should get out of the business of homeownership altogether. Is this true?
This is a natural question to consider in light of the current situation, and there is certainly some validity to the notion that the “American Dream” of homeownership left many asleep at the wheel when the factors contributing to the crisis were building. For example, there were warning signs that the risky mortgage products being pushed to homebuyers were not viable and that housing values were rising to unsustainable levels years before the crisis. However, because of the preoccupation with increasing homeownership, there wasn’t sufficient attention given to the means by which homeownership was being obtained.
That being said, however, this does not mean that government should “pull out” of the business of homeownership. There is a critical role for government in not only addressing the current crisis, but in structuring the housing market to ensure future stability and preventing future problems. For example, the government has a critical role in establishing the rules of the game for market participants, so that the mortgage market can operate efficiently. Clearly specified, transparent rules for market participants are critical to preventing predatory practices and unequal playing fields (witnessed over the last decade). Further, the government has a critical direct role in facilitating equal access to affordable credit across geographic, income, racial and ethnic lines; something that the market alone does very poorly. Research suggests that as much as 30-50% of the households that received high cost (subprime) mortgages could have qualified for more affordable conventional loans. But, due to geographic disparities in the marketing (and targeting) of subprime products, relative to affordable products, many vulnerable homebuyers were not aware of (or appropriately informed about) the more affordable alternatives.
5. How is the housing crisis going to affect the outcome of the mid-term elections? Are Ohio voters mad because of the crisis?
I am not a political scientist and I don’t study public opinion, so my response to this question is somewhat limited. However, I think we can safely say that most Ohioans have been affected, in a very real way, by the housing crisis- whether it is their own personal struggle to pay their mortgage, concerns about the effects of foreclosures in their neighborhoods, or the decreasing value of their own properties. Ignoring the housing crisis, including issues related to both stabilization and prevention, would likely not be a smart political strategy for any candidate this mid-term election. The key will be to move beyond rhetoric to work towards real solutions.
