Post-Mortgage Meltdown, Where Do We Go Now?, National Public Radio (NPR)

For more than 20 years, the mantra in Washington has been “more, not less” when it comes to Fannie Mae, Freddie Mac and the expansion of homeownership.

But in light of the financial crisis and Fannie and Freddie’s near-collapse, policy leaders are also rethinking the government’s role — and many Americans are starting to question whether homeownership is the only path to the American Dream.

Fannie and Freddie function by buying, bundling and then stamping a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing, and it keeps consumers happy because it makes low, fixed-rate mortgages possible.

At least that how things were supposed to unfold. But the two mortgage finance giants “made astonishing mistakes,” Raj Date, executive director of a financial policy think-tank called the Cambridge Winter Center, told NPR’s Audie Cornish.

‘It Has All Come Back To Haunt Them’

“As normal people everywhere in the country realized that housing prices seemed to be growing straight into the stratosphere, instead of becoming more conservative about lending against those ridiculously high values, Fannie and Freddie just continued to make the same kind of loans and indeed made more aggressive loans during that period of 2005, 2006, 2007,” Date said. “And it has all come back to haunt them.”

So instead of rationally-priced credit, he said, the country wound up with a $6 or $7 trillion bubble in housing values. And all of Wall Street and most of the country’s banks made the same sort of mistakes, Date said.

Policy makers are at a bit of a crossroads, said Date, who was among a number of industry leaders who huddled with Treasury Secretary Timothy Geithner this week to figure out a new way forward on housing.

Fannie and Freddie have dramatically scaled back their level of aggressiveness in underwriting credit, Date said. But, he added, “the fact of the matter is that on average and over time, Fannie and Freddie represent an economic subsidy from the public at large to middle and upper middle-income homeowners.”

Despite talk on Capitol Hill of dismantling the two organizations, it might be tough to get rid of them. That’s because Fannie and Freddie, along with the Federal Housing Administration, are responsible for some 95 percent of the mortgages in the country today, Date said.

“If you think that the fall of 2008 was calamitous, believe me, you haven’t seen anything yet if you were just somehow to turn off the lights on Fannie and Freddie today,” he warned. “That said, I think the policy makers are trying to be thoughtful about the right long-term answer is for housing finance more broadly, and that involves revisiting some issues that have been treated as sort of untouchable for quite some time.”

Ultimately, Date said it might be time to rethink homeownership as an American ideal.

The White Picket Fence Reconsidered

“The world we live in today is not quite the world that existed in 1950,” he noted. “The nature of households and the rate at which they dissolve and reform, the nature of work and its transient nature across geographies are all things that suggest that maybe, just possibly, a middle-class American shouldn’t stake themselves to an illiquid, very large, concentrated, leveraged asset —- that is to say, a house.”

Alyssa Katz, author of Our Lot: How Real Estate Came To Own Us, also thinks America needs to reconsider the American Dream.

“Homeowenership has gone from being pretty much an unmitigated good — something that would provide stability — and instead has thrown a huge cloud of doubt over the value of homeownership for a lot of people.”

Even so, there also are downsides to renting, she said.

“Some of the common beliefs about renting are absolutely true,” Katz said. “Being a renter has very little security. They don’t have any promise they’ll be able to live in the apartment or home for more than a year or two. Renting is also perceived as something that really divides Americans by class. So I think for a lot of potential renters, or people who own and are thinking of making that transition to renting, they have to overcome this sense that they are giving up a sense of status.”

That’s a tough thing to shake for many Americans, she said.

If more people rent, the benefits of homeownership will only increase for those who own homes because the pool will shrink, Katz said.

“Those who have access to homeownership and the benefits that it brings, as a result of policy, will be even more privileged than they are now.”

Foreclosure rate soars in suburbs, Steve Law, Portland Tribune

While Portlanders continue to be plagued by home foreclosures, the number of distressed homeowners is spiking even faster in the suburbs these days.

Foreclosure actions filed against homeowners in upscale Lake Oswego mushroomed 20 percent the first six months of this year, compared with the same period last year, and rose 10 percent in jobs-rich Hillsboro, according to RealtyTrac Inc., an Irvine, Calif., real estate data services company. RealtyTrac counted nearly 300 Lake Oswego properties socked with foreclosure actions from January through June and more than 500 Hillsboro properties.

Foreclosures also shot up at a rate faster than Portland in suburban Oregon City, Milwaukie, Tigard, Tualatin, Sherwood and St. Helens.

“The foreclosure activity that is occurring in suburban markets in Oregon is unprecedented,” says Tom Cusack, a retired federal housing manager in Portland who continues to track the issue via his Oregon Housing Blog. “It’s affecting not just rural areas, not just inner-city neighborhoods, but suburban neighborhoods, probably more substantially than any time in the past,” Cusack says.

From January through June, foreclosure filings grew 6.5 percent in the city of Portland, compared with a year earlier, and 8.5 percent in Portland suburbs, not counting Clark County, according to RealtyTrac data.

In 10 different local ZIP codes — three in Portland and seven in the suburbs — foreclosure actions were filed against more than 2 percent of all properties the first six months of 2010.

Dominating local market

Realtors say a record number of foreclosures dominates the area housing market, depressing home prices but also attracting bargain-hunters looking for distressed properties.

“Either you’re helping people get into them or helping get out of them,” says Fred Stewart, a Northeast Portland Realtor who operates a website listing foreclosed homes for sale in Multnomah County.

Distressed properties account for “40 percent of the business right now,” says Dale Kuhn, principal broker for John L. Scott Real Estate in Lake Oswego.

Every suburb is a unique real estate market, so it’s hard to generalize why some are experiencing more foreclosures now than before. In West Linn, for example, foreclosure filings were down the first six months of the year compared to a year earlier, while things are going in a different direction in its affluent neighbor to the north, Lake Oswego.

Explanations vary

One factor could be that many borrowers of modest means took out subprime loans, which were the first to go through foreclosure when those loans “exploded” and reset to much-higher interest rates. Working-class neighborhoods had the highest foreclosure rates in the early months of the Great Recession.

“They got hit the hardest first,” says Rick Skaggs, a real estate broker at John L. Scott in Forest Grove.

In the Portland area, an unusually high number of middle-class and affluent borrowers took out interest-only loans and Option ARM or negative-amortization loans. Option ARMs (adjustable rate mortgages) allowed the borrower to pay a minimum monthly mortgage payment — akin to a credit card minimum payment — while tacking more principal onto the loan. Option ARMs and other alternative loans took longer to unravel than subprime loans, and many are now winding up in foreclosure. And those mortgages were more common for more expensive properties.

They were ticking time bombs, like subprime loans, but they had longer fuses, says Angela Martin, of the Portland public interest group Our Oregon.

Stewart offers another reason for the surge in suburban foreclosures. He’s noticing a larger pool of buyers now for closer-in Portland neighborhoods, as people seek to avoid long commutes. People selling distressed properties in Northeast and Southeast Portland have more options to sell than someone saddled with an unaffordable mortgage in a suburb, Stewart says.

Tables turned

Recent state and national statistics also reveal a counterintuitive trend — affluent homeowners are going into foreclosure lately at a higher rate than others.

Cusack recently analyzed data for Oregonians who took out traditional 30-year Federal Housing Administration loans since mid-2008. He found that the greater the loan amount, the greater the chances those became problem loans.

“The default rate and the seriously delinquent rate were higher for higher-income loans,” Cusack says.

Business owners and other affluent homebuyers who settled in suburban markets also had more resources available to hold onto their homes than lower-income homeowners, at least during the earlier stages of the Great Recession. That may explain why places such as Lake Oswego are seeing such an upsurge in foreclosures now.

“If you paid a half-million for anything in Lake Oswego in 2007, you’re ‘under water,’ ” Stewart says. That’s the term for people who owe more on their mortgage than their home is worth.

Portland bankruptcy attorney Ann Chapman, of the firm Vanden Bos & Chapman, is seeing an uptick in affluent clients coming to her office.

They had been turning to pensions, savings and family money to hold onto their homes and businesses, Chapman says. But as the economic downturn grinds on, some clients see the best option as dumping their home and filing for bankruptcy reorganization.

Affluent homeowners make a more sober assessment when they realize their homes aren’t going to be worth the mortgage amount for many years, she says. “They’re going to potentially be less emotionally involved when it comes to stopping the bleeding.”

It’s often a different story for lower-income homeowners who hope to hold onto the only homes they’ve ever had, or hope to have. “They get blinded by their optimism or their paralysis,” Chapman says.

Little relief in sight

Many Realtors say it’s a great buyer’s market now for those who have steady jobs, because interest rates are low and prices have fallen so much. But don’t expect the onslaught of Portland-area foreclosures to end any time soon.

“We are nowhere near the end if you look at the number of homeowners that will ultimately be at risk,” says Martin, citing a new study by the North Carolina-based Center for Responsible Lending. Based on that study, she figures Oregon is only halfway through the foreclosure crisis, in terms of the number of people affected by foreclosures.

Skaggs says he wishes he could be more positive, but he doesn’t see the light at the end of the tunnel. He just spoke with an investor last week who is about to walk away from five rental homes and let the bank take them back. Three of the homes are in the Beaverton area, one is in Bend and one is on the Oregon Coast.

“I probably know at least 15 people that in the next month or two are going to walk away from their homes.”