Fixing the Housing Market: What to Expect from Obama’s SOTU Speech

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Scott J. Ferrell / Congressional Quarterly / Getty Images

President Barack Obama delivering last year's State of the Union. Expect the president to address the housing market as well as the Home Affordable Modification Program.

What’s President Obama’s plan for getting the housing market back on track? Look for proposals—but not necessarily solutions—in tonight’s State of the Union address.

On Monday, government officials announced that a $25 billion settlement to help troubled homeowners refinance or reduce the principals owed was close to becoming a reality. Five major banks—Bank of America, Wells Fargo, Citibank, JPMorgan Chase, and Ally Financial—are currently in negotiations with U.S. state attorneys general to reach a settlement that would aid Americans hurt by foreclosure wrongdoings and deceptive lending practices on the behalf of the banks.

In his State of the Union speech, President Obama will comment about the progress of the settlement, which is expected to be finalized within weeks, and which has received mixed reviews (at best) from several state AGs. Delaware has said it will drop out of negotiations, and California won’t sign on. Critics say that the proposed settlement doesn’t go nearly far enough, and that the Obama administration is developing a reputation for announcing housing programs that seem substantial but have little noticeable impact.

(MORE: Foreclosure Timeline Lengthens to Record 21 Months)

While a $25 billion settlement sounds impressive, it will barely make a dent in the housing market. One in four homeowners—11 million American households—are underwater with their mortgages. Only 1 million homeowners, though, would be eligible to get a piece of the settlement, and the average principal reduction payment will be only about $20,000.

Overall, the settlement is expected to allocate $17 billion for principal reductions and $3 billion to help homeowners refinance. Another $5 billion would be placed in various state and federal reserve accounts, where it can be doled out to homeowners affected by deceptive foreclosure and lending practices. Each affected homeowner could receive a check for $1,800, though it’s expected that only about half of the 750,000 eligible households will actually get any money.

It’s clear the government understands that more needs to be done to spur on the housing market. In a rare move two weeks ago, the Federal Reserve released a 26-page white paper that urged lawmakers to once again help with the sluggish housing sector. The real estate market is the “only factor behind the frustratingly slow” economic recovery, said William Dudley, New York Fed President.

(MORE: What the Government Could Still do to Help Housing)

So far, programs introduced by the Obama administration have had limited success in helping underwater homeowners or clearing out bank-owned inventory. Most notably, to date, the Home Affordable Modification Program (HAMP) has processed only 910,000 of the nearly 4 million applications from homeowners who’ve applied for assistance with underwater mortgages. The program promised to help as many as 5 million homeowners, but fraudulent claims and poor organization have greatly slowed down processing times. As a result, the impact of HAMP has proved disappointing, with relatively few homeowners able to take advantage of the program.

Another program, still in the discussion phase, would involve renting out foreclosed homes, perhaps even to their former owners. The idea is that a government-sponsored renting program could be a successful answer to dealing with pending inventory—the excess housing supply that remains off the market. At the very least, such a program would help fill many of the perfectly good but vacant homes out there.

There’s good reason for the government to foster a stronger rental market—because it’ll wind up helping the home sale market as well. As the cost of renting increases, renters will ultimately consider buying. Prices also rise as more investors become interested in purchasing rental properties. Government data shows that rents rose 3% alone in the third quarter of 2011, which is better than the expected annualized rate.

(MORE: Obama’s Refinance Program: Underwhelming Policy, Expedient Politics)

In tonight’s SOTU, President Obama will no doubt address the housing market and highlight the $25 billion settlement with the banks. He’ll toss out big numbers, and even bigger expectations for a recovery. But if the HAMP experience has taught us anything, it’s that there is no quick fix for the housing market, and that government programs often promise more than they wind up delivering.

Katherine “Katie” Tarbox serves as a senior editor for REALTOR Magazine and is the author of the international bestselling book A Girl’s Life Online. She’s an active marathon runner and climbed on two of the seven summits, Kilimanjaro and Everest. She is a graduate of the University of Pennsylvania. Follow her @katherinetarbox or