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US housing: Where do we stand?

I had the opportunity to attend and present at a Pew Charitable Trust Symposium last week in Washington.  It convened a group of experts from government, the private sector and academia to discuss the state of the US housing market, and what the federal government and industry might do to ensure its recovery.

In general, the tone was cautious optimism, but there remain many things that might impede housing recovery, and with it, US economic recovery.  While the obvious culprit could be the ongoing problems that are playing out in Europe, there are others.  The legal issues that have slowed down the clearance of foreclosure cases looks to be ending, but there is a backlog inventory of homes, which as it clears could cause a negative impact on prices.  More importantly, some 14 million homeowners remain underwater, with 6.5 million being more than 30% underwater.  If there is an acceleration in the default rate for these homeowners, it could cause another slump in prices. This is the iceberg in the US housing market.

The question is how to mitigate the downside risk.  The gist of my remarks at the symposium was a call for action rather than a call for more analysis.  FICO research shows that there is much to be gained from allowing for more flexibility in policy and how the rules should be applied. 

As regular readers of this blog know, we write a lot about the use of decision models. Trying to decide what modification to make on which borrowers is an ideal application of this approach.  The good news is that we are now far enough into this crisis that we have a decent (if not perfect) idea of what types of modification actions result in lower re-default rates for specific profiles of borrowers.  A number of the other presenters reported their results on this topic, and they were broadly in line with our own findings. 

What we need to do is turn this knowledge into actions.  Combining the insights from existing data on modifications actions along with the findings we have already published on the strategic default population, which is directly relevant to the 14 million underwater borrowers, would be a good way to move forward.

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