September 28, 2009

The Honorable Barack Obama
President of the United States
The White House
1600 Pennsylvania Ave., N.W.
Washington, D.C. 20500

Dear President Obama:

We write on behalf of the nation’s more than 70 million American homeowners to request that you take immediate steps to avert another crisis in the housing market.  Your administration’s ongoing efforts to address the recession and the mortgage crisis are greatly appreciated by all of us. Many challenges still remain, but the recession would still be a lot worse and home values a lot less today were it not for your efforts.

Despite those admirable efforts, ominous clouds are still hanging over the housing market. Home values continue to decline in many areas. Almost seven million homes will ultimately be foreclosed on, according to the Amherst Securities Group. That is the equivalent of almost a year and a half of inventory. That large inventory is a major barrier to the recovery of home values and will continue to drive down home prices. This staggering amount of nonperforming assets continues to threaten the viability of many mortgage lenders.

The subprime mortgage crisis has expanded into a prime mortgage crisis. Homeowners with excellent prior credit histories are increasingly in trouble. At the beginning of 2007 only about 2% of fixed rate or adjustable prime mortgages were in foreclosure or more than 90 days delinquent. By the end of this past June, 9% were at that point. Meanwhile the share of the remaining subprime mortgages that were in foreclosure or more than 90 days delinquent has grown from 8% to 27% over the same period. One in eight American homeowners with a mortgage was in foreclosure or behind on their mortgage payments by the end of June.

The growth in troubled and foreclosed prime mortgages is no doubt due in large part to increased unemployment, and it underscores the fact that many former creditworthy homeowners will be out of the housing market for many years to come due both to trashed credit and lack of cash. Economists are predicting a relatively jobless recovery in an economy where the jobless rate is approaching 10% and may go higher. There are few factors that are likely to increase demand for homes over the next several years, and numerous factors that, left unchecked, are very likely to further reduce home values.

The current situation would be substantially worse were it not for the first time buyers tax credit. An estimated 350,000 first time buyers will have used it before it expires on December 1, and the entry of these new homeowners into the market has played a significant role in staving off further declines in home values. These new buyers are also having a multiplier effect, enabling many existing home sellers to sell their home and move up the housing food chain. The expiration of the credit will likely be a precursor for another round of significant drops in home values and a jump in foreclosures, and a major challenge to our still fragile economic recovery.

The most important step you can take to prevent a further meltdown in housing values and a resulting new wave of foreclosures is to undertake an immediate major effort to encourage Congress to extend, increase, and expand eligibility for the first time home buyers tax credit. A number of pending Congressional measures would extend the existing tax credit for another year, and several would also expand the eligibility and increase the cap on the credit.

The biggest challenge to the extension is the federal tax revenue loss that would result from various versions of the credit’s extension, which range as high as $38.5 billion. The size of the federal deficit is a concern to all of us, and this is a lot of money. One of the few bright spots on the economic horizon is the expected repayment of some of the TARP funds loaned to financial services firms. Since many of those firms are involved in the mortgage market, they would benefit from stabilization of home values. For that reason, it would make sense to earmark those repayments to cover the revenue losses from the home buyers’ tax credit’s extension.

In addition to supporting the most robust possible tax credit extension, we believe other steps are also necessary to prevent substantial further declines in home values. We very much appreciate your administration’s ceaseless efforts to work with mortgage lenders and mortgage servicers to encourage them to modify mortgage terms when it is in the mutual best interest of their stockholders and distressed homeowners. Sadly, those efforts have born little fruit despite the massive amounts of taxpayer subsidies already provided those companies and the recent additional tax incentives they are being offered to subsidize mortgage modification costs.

Our take is that the lenders are ungrateful for these taxpayer bailouts. Worse, they are now playing a game of chicken with your Administration, American homeowners, and other taxpayers. They know further drops in home values will put millions more homeowners on the street. They’re counting on the Administration and Congress to cave in and pay off the full amount of those nonperforming mortgages in order to stop the bleeding. Large bonuses to financial services executives will surely follow. There is a better solution, however.

House Financial Services Committee Chairman Barney Frank has taken stock of this situation and recently announced that he will seek reconsideration of bankruptcy reform legislation if lenders and loan originators don’t step up their efforts to modify mortgages. Since lenders are not willing to take actions to correct the problem that they caused, we urge you to strongly and publicly back Mr. Frank’s support for bankruptcy reform legislation to enable bankruptcy judges to restructure mortgages when it will help both homeowners and the mortgager’s stockholders.

We also support your efforts to reform management practices in the financial services sector. The management decisions that lead to the mortgage crisis reflect the abdication of financial services sector managers’ fiduciary duty to prudently manage their stockholders’ assets. Also largely missing is a sense of duty to help our country in this crisis. When our country entered World War II, manufacturers in many sectors put their country’s interest first. They supported the largest industrial mobilization the world has ever seen, and it was a major reason for the allies’ victory. By contrast U.S. financial services firms caused our mortgage crisis. We bailed them out, and offer them subsidies to use that money to restructure mortgages when it is in their own interest. We have no inspired ideas for legislative provisions that could restore good judgment and a sense of moral character to this sector, but such provisions are surely needed.

Thank you for all you have done to help American homeowners and restore our economy. We wish you great success and pledge our support for these and other efforts in the future.

Sincerely,

Bruce N. Hahn
President

C: The Honorable Timothy F. Geithner