Stonewalling a US housing recovery

In the coming weeks, Washington will discover whether Edward DeMarco, acting regulator of the Federal Housing Finance Agency, is susceptible to political pressure. Most Americans have not heard of DeMarco. But millions of homeowners will be affected by what he decides. One way or another, that will also apply to his nominal boss, President Barack Obama.

More than four years after the bubble burst, the moribund US housing market has shown signs of life. Much like the welcome but still modest falls in US unemployment, it would be premature to celebrate the housing market's recent stirrings. Just as the US labour market is conditioned by the millions who have dropped out of it, so house prices are anchored by the 11 million or so Americans whose homes remain 'underwater' (ie the houses are worth less than their mortgages).

Until this huge backlog of potential foreclosures is cleared, which could take four more years at the current rate, America is unlikely to see a robust housing recovery. This means the economy would be unlikely to exceed its trend growth rate (nowadays estimated at 2 per cent to 2.5 per cent). That in turn means joblessness would be unlikely to fall much further. Without a full US housing recovery, the overall one is unlikely to hit escape velocity. So say economists across the spectrum.

This is where DeMarco comes in. Rarely in the annals of American administrations has one president encountered so much stubbornness from one regulator. So far DeMarco has resisted White House blandishments to allow large writedowns of the principal mortgages of delinquent borrowers. Indeed, he has been blocking efforts to provide more help for distressed homeowners since Obama took office. He has played the immovable object; Obama, the resistible force.

Might it be different this time? The auguries are not good. Last week DeMarco gave a rare speech, in which he dwelt on his objections to most kinds of principal writedown. Among his reasons were that forgiveness would result in a loss to US taxpayers, whose fiduciary interests he is paid to serve (it would be the government-backed Fannie Mae and Freddie Mac, whom DeMarco regulates, that would be taking the haircuts). Another was that it would incentivise those who are current on their mortgages to default and get assistance.

Both objections had been heard before. Both had supposedly been superseded by White House policy. Yet Obama keeps pulling levers that do not work. In a normal democracy, which once included the US, the president would get to choose who headed a government agency and fire those he did not like. Nowadays the US Senate blocks or delays any vaguely contentious nominee. DeMarco thus remains the 'acting' head of the FHA.

And so through DeMarco's supposedly transient perch runs the main faultline of American politics. Following the polarising bailout of Wall Street, the Republicans will not sanction any bailout of Main Street. Moral hazard is their watch phrase. The irresponsible will no longer be rewarded. Democrats, meanwhile, believe the housing market will not recover without help. Yet they – and Obama in particular – have come late to this realisation. And what is on offer is still too little. Almost four years after the $700 billion Troubled Asset Relief Program for the banks, US house prices still languish roughly a third below their peak.

The situation has long demanded a bazooka. Obama is offering only a rifle, which DeMarco remains reluctant to use. And it took three years for the president even to do that. He has lacked the conviction to risk a political fight with the Tea Party – Tarp poisoned the well for any further taxpayer assistance. Indeed, he could not bring himself to sack DeMarco and appoint a more amenable acting head – well within his powers. The risk of more populist uproar would be too great.

Yet Obama has strong arguments at his disposal. The belief that we should let the market reach its natural bottom comes from the scribblings of the same dead economists who influenced Andrew Mellon, Herbert Hoover's Treasury secretary – the man whose mania for liquidation plunged the US into depression. Economics has since abandoned the idea there is any objective equilibrium in the housing market. Nowadays economists talk of "multiple equilibria”, which in English means regulators can influence the price at which the market clears. Which in plain English means there is a solution. All that stands in its way is politics.

There are two even better arguments, both of which make usable sound bites – in fact Obama often uses them. The first is that irresponsible borrowers – the subprime offenders – have long since defaulted. Most of the homeowners now underwater have been hit by the wave of foreclosures around them and are being punished for bad luck. Most are not behind on their mortgages. You could say they are suffocating responsibly.

The second is even more basic. Every American is damaged by the bad housing market because it holds down the rate of economic recovery. Reviving it has nothing to do with morality. It is about raw, capitalist self-interest. It is therefore also about protecting the taxpayer. What a pity Obama is still reluctant to enforce his own arguments.

Copyright The Financial Times Limited 2012.