Obama Fixes the Housing Market Again (and Helps the Troops)

Yesterday President Obama announced yet another set of programs intended to help the housing market.  The majority of these are aimed at helping active service members of the military.  For instance the proposal would compensate service members who were wrongly foreclosed upon and help re-finance into lower rates service members wrongly denied that opportunity.  Assistance would also be provided to service members who suffered losses because they had to sell their homes due to a change in station (that is the military ordered them to move).

While some of these changes are likely to benefit service members, the impact on the overall housing market is likely to be very small.  From what little details we have, it appears most benefits will be limited to currently active service members.  Let’s start with the re-finance piece.  There are just over 1 million active military living in the U.S. (another quarter million stationed overseas, who we lack data on), of those just over 300,000 both own their home and have a mortgage (about 80,000 own free and clear).  Interestingly just over 2/3rds purchased their home since the housing bubble burst.  During this time mortgage rates have been fairly low, so its probably reasonable to assume that these borrowers already have low rates and won’t benefit from a re-finance.  I haven’t been able to find data on how many longer-term borrowers have already re-financed, but its sure to be a significant amount.  So our upper-bound is that about 100,000 service members might be able to benefit from a re-finance, I suspect the actual number is much lower.  And of course, who knows what “wrongly denied” means.

The “wrongly foreclosed” piece is a lot harder to estimate, so take this with a huge margin of error.  First we don’t know how many active duty borrowers have even been foreclosed upon.  If we assume foreclosure rates similar to the VA loan program (good reasons to think it could be higher or lower), then about 12,000 service members are likely to have been foreclosured upon since the bubble burst.  The “wrongly” is even harder to figure out.  If interpreted narrowly, then say 1%, gets us to just over 100 loans.  Even 10% gets us to about 1,000 loans.  Under any reasonable estimate a pretty small number compared to the overall housing market.

The permanent change of station piece is the other big piece.  Setting aside that service members taking a loss on their home has long been an issue and just why it has become important now we will leave to the imagination (an election year perhaps?).    Of those active duty service members who moved in the last year, about 100,000 had a mortgage, and so could have taken a loss.  If they were underwater to the same extent as the general population (probably an under-estimate), then this program will help somewhere between 20,000 and 30,000 borrowers.

While it is important that anyone actually wronged be compensated (that’s what we have courts for), the impact of Obama’s latest plan, like his previous plans, is likely to be extremely small and do almost nothing to help the overall housing market.

Note:  data are my estimates from Census’ American Community Survey.  If you have better, please share.