At the risk of beating a dead horse, it's time again to look at the engine that drove the Great Recession and which is now killing any real recovery: the housing market. Both the Los Angeles Times and FrumForum have pieces that look at the continuing debacle and the abject failure of Congress and the White House to do anything meaningful to address the problem. Dealing with distressed homeowners every day, I can testify that the so-called Home Affordable Modification Program is little more than a joke. And a sick joke at that. Lenders have no accountability and frankly, most personnel one deals with are utterly incompetent and have about as much reasoning skill as a trained circus dog - no offense intended towards dogs. For almost FOUR years now I have been railing about this issue and nothing meaningful has been done other than a huge bailout to lenders who have done nothing to assist homeowners with legitimate hardships. First, here are highlights from the LA Times:*
Almost anywhere you look, assessments of the state of the economic recovery are muddled — job growth is positive but fading, consumer spending ebbs and flows, corporate profits are surging but corporate spending is not. The exception is housing, on which everyone agrees. The housing market stinks.
*
The latest national Case-Shiller index of home prices fell again in April from a year earlier. It was up modestly from March, but since that month marked a new recession low, pushing average prices back to levels not seen since 2002, at best we're bumping along the bottom. About 4.5% of all mortgages are still in foreclosure, more than four times the historical average . . .
*
Yet housing is the area in which the government's remedial efforts have been consistently the weakest. The gap between the government's effort to bail out bankers and its effort to bail out homeowners is a national scandal. Under the Troubled Asset Relief Program, the government's bank bailout, some $50 billion was earmarked for mortgage relief; by late last year, according to the Congressional Budget Office, only $8 billion had been committed and much less had been spent.
*
HAMP hasn't been a total flop. The redefault rate of less than 20% on its mortgages is about half that of other mortgage relief programs. But it's enough of a disappointment that Treasury officials recently took a step almost unique in their regulatory record: They penalized three big banks for their shortcomings in managing HAMP. The banks are Wells Fargo, Bank of America and JP Morgan Chase.
*
The shame of HAMP is that federal mortgage relief didn't have to be so halfhearted. HAMP's drafters had a successful model to work from. That was the New Deal-era Home Owners' Loan Corp., or HOLC, a program that saved 1 million homes from loss in the depths of the Great Depression and completely remade the country's mortgage market in the process.
*
What really enabled HOLC to succeed was that its incentives were all aimed at keeping borrowers in their homes. That's not the case with today's mortgage market, where the incentives are canted toward foreclosures. HAMP has done very little to correct that.
*
The key to keeping a financially strapped borrower in a home is to modify the mortgage to cut the monthly payment, whether by cutting the interest rate or loan balance or by stretching out the repayment term. What makes this difficult is that often the loan servicer — the bank or office that bills the homeowner and tracks his or her payment history — doesn't own the loan, which has been packaged and sold to investors.
*
In fact, servicers have powerful incentives to do the wrong thing — wrong for borrowers, wrong for investors, wrong for the economy. They make more money, and have better guarantees of payment, if they delay modifications, even if they force homeowners into foreclosure.
*
[A] bigger flaw is that the government's housing policy doesn't acknowledge that a genuine, lasting solution to the housing crisis means reducing the loan balances of financially stressed homeowners to levels that make sense in terms of today's sharply reduced home values.
*
No stimulus program would be as effective today as fixing the residential market. Yet, typically, the momentum in Congress is in the other direction, with House Republicans plotting to repeal HAMP. It's not that they have any better idea; it's that when it comes to helping the economy, they abhor anything but a vacuum.
*
The FrumForum column repeats much of the same territory and flat out says that the continued housing disaster is killing the economy. Here are some highlights:
*
For those who may think that the housing market has bottomed out and there is a light at the end of the tunnel, think again. That isn’t a light at the end and it’s not a train coming either. It might just be a blistering ray of solar radiation that could evaporate everything it is path, a wave of housing supply that will quickly overwhelm any hope for home price stabilization, much less an actual recovery. There is a shield, however, if politicians, policy makers and regulators can find the fortitude to redefine the American Dream.
*
Over the last 6 months, the nation’s housing supply has been artificially (and temporarily) held at bay by moratoriums imposed on the big servicers over foreclosure practices while buyer demand has remained relatively constant. Econ 101 would instruct us that, under this scenario, home prices should rise. Instead, during the same period home prices continued their decline, falling an additional 4-5% on an adjusted basis. According to an increasingly number of economists, including Robert Schiller, we should expect to see this trend continue another 20-25% over the next several years. Why? Because the supply of homes expected to hit the market is more than double all of the homes sold in 2010 and YTD 2011 combined. Large banks, private investors and the GSE’s know this and are racing to the bottom to unload their existing homes before the tsunami hits.
*
Recent CNNMoney headlines are telling. “Walk Away from your Mortgage: Time to Get Ruthless” (June 7) highlights the driving force behind all of this supply: underwater homeowners. The number of “strategic” defaulters is accelerating as more people make a basic economic decision to walk away.
*
In a recent Fannie Mae survey, 27% of homeowners would consider walking away from their mortgage if home prices keep falling, nearly double from a year ago, and more than 50% no longer believe owning a house is a good investment.
*
The number of people who fit into these buckets is staggering: More than 4 million mortgage borrowers are either in foreclosure or are seriously delinquent. Most of their houses will end up on the market as short sales or foreclosure sales. Private estimates put the figure, often referred to as “shadow inventory” at more than 6 million.
*
Supply will increase and demand will decrease, driving home prices down, which in turn will create a self-perpetuating cycle. So how do we stabilize home prices if there is limited homeowner demand? The answer, of course, is to reduce the supply through other means.
*
What are required are bold governmental initiatives to promote renting as a means to stabilize home prices. Start by accelerating the sale of entire GSE and FHA REO positions, which are worth on the order of $40-$50 billion, to private investors who could form large scale leasing portfolios. Divert what remain of federal and state funds from loan modification programs to rental-assistance programs. Rather than pay mortgage servicers to modify deeply delinquent borrowers who, after modification of the payment, are still underwater on their homes, reward servicers to convert them into tenants at reduced housing payments. Keeping people in homes and kids in schools while avoiding foreclosure signs on front lawns is almost always a good thing. Modifying borrowers to buy time without addressing negative equity is rarely an optimal outcome. And maybe, just maybe, adjust tax incentives to take into account all forms of housing payments, not just mortgage interest.
*
I don't necessarily agree with the proposed solution, but at least it would be doing SOMETHING as opposed to nothing which is what is the current reality.
Almost anywhere you look, assessments of the state of the economic recovery are muddled — job growth is positive but fading, consumer spending ebbs and flows, corporate profits are surging but corporate spending is not. The exception is housing, on which everyone agrees. The housing market stinks.
*
The latest national Case-Shiller index of home prices fell again in April from a year earlier. It was up modestly from March, but since that month marked a new recession low, pushing average prices back to levels not seen since 2002, at best we're bumping along the bottom. About 4.5% of all mortgages are still in foreclosure, more than four times the historical average . . .
*
Yet housing is the area in which the government's remedial efforts have been consistently the weakest. The gap between the government's effort to bail out bankers and its effort to bail out homeowners is a national scandal. Under the Troubled Asset Relief Program, the government's bank bailout, some $50 billion was earmarked for mortgage relief; by late last year, according to the Congressional Budget Office, only $8 billion had been committed and much less had been spent.
*
HAMP hasn't been a total flop. The redefault rate of less than 20% on its mortgages is about half that of other mortgage relief programs. But it's enough of a disappointment that Treasury officials recently took a step almost unique in their regulatory record: They penalized three big banks for their shortcomings in managing HAMP. The banks are Wells Fargo, Bank of America and JP Morgan Chase.
*
The shame of HAMP is that federal mortgage relief didn't have to be so halfhearted. HAMP's drafters had a successful model to work from. That was the New Deal-era Home Owners' Loan Corp., or HOLC, a program that saved 1 million homes from loss in the depths of the Great Depression and completely remade the country's mortgage market in the process.
*
What really enabled HOLC to succeed was that its incentives were all aimed at keeping borrowers in their homes. That's not the case with today's mortgage market, where the incentives are canted toward foreclosures. HAMP has done very little to correct that.
*
The key to keeping a financially strapped borrower in a home is to modify the mortgage to cut the monthly payment, whether by cutting the interest rate or loan balance or by stretching out the repayment term. What makes this difficult is that often the loan servicer — the bank or office that bills the homeowner and tracks his or her payment history — doesn't own the loan, which has been packaged and sold to investors.
*
In fact, servicers have powerful incentives to do the wrong thing — wrong for borrowers, wrong for investors, wrong for the economy. They make more money, and have better guarantees of payment, if they delay modifications, even if they force homeowners into foreclosure.
*
[A] bigger flaw is that the government's housing policy doesn't acknowledge that a genuine, lasting solution to the housing crisis means reducing the loan balances of financially stressed homeowners to levels that make sense in terms of today's sharply reduced home values.
*
No stimulus program would be as effective today as fixing the residential market. Yet, typically, the momentum in Congress is in the other direction, with House Republicans plotting to repeal HAMP. It's not that they have any better idea; it's that when it comes to helping the economy, they abhor anything but a vacuum.
*
The FrumForum column repeats much of the same territory and flat out says that the continued housing disaster is killing the economy. Here are some highlights:
*
For those who may think that the housing market has bottomed out and there is a light at the end of the tunnel, think again. That isn’t a light at the end and it’s not a train coming either. It might just be a blistering ray of solar radiation that could evaporate everything it is path, a wave of housing supply that will quickly overwhelm any hope for home price stabilization, much less an actual recovery. There is a shield, however, if politicians, policy makers and regulators can find the fortitude to redefine the American Dream.
*
Over the last 6 months, the nation’s housing supply has been artificially (and temporarily) held at bay by moratoriums imposed on the big servicers over foreclosure practices while buyer demand has remained relatively constant. Econ 101 would instruct us that, under this scenario, home prices should rise. Instead, during the same period home prices continued their decline, falling an additional 4-5% on an adjusted basis. According to an increasingly number of economists, including Robert Schiller, we should expect to see this trend continue another 20-25% over the next several years. Why? Because the supply of homes expected to hit the market is more than double all of the homes sold in 2010 and YTD 2011 combined. Large banks, private investors and the GSE’s know this and are racing to the bottom to unload their existing homes before the tsunami hits.
*
Recent CNNMoney headlines are telling. “Walk Away from your Mortgage: Time to Get Ruthless” (June 7) highlights the driving force behind all of this supply: underwater homeowners. The number of “strategic” defaulters is accelerating as more people make a basic economic decision to walk away.
*
In a recent Fannie Mae survey, 27% of homeowners would consider walking away from their mortgage if home prices keep falling, nearly double from a year ago, and more than 50% no longer believe owning a house is a good investment.
*
The number of people who fit into these buckets is staggering: More than 4 million mortgage borrowers are either in foreclosure or are seriously delinquent. Most of their houses will end up on the market as short sales or foreclosure sales. Private estimates put the figure, often referred to as “shadow inventory” at more than 6 million.
*
Supply will increase and demand will decrease, driving home prices down, which in turn will create a self-perpetuating cycle. So how do we stabilize home prices if there is limited homeowner demand? The answer, of course, is to reduce the supply through other means.
*
What are required are bold governmental initiatives to promote renting as a means to stabilize home prices. Start by accelerating the sale of entire GSE and FHA REO positions, which are worth on the order of $40-$50 billion, to private investors who could form large scale leasing portfolios. Divert what remain of federal and state funds from loan modification programs to rental-assistance programs. Rather than pay mortgage servicers to modify deeply delinquent borrowers who, after modification of the payment, are still underwater on their homes, reward servicers to convert them into tenants at reduced housing payments. Keeping people in homes and kids in schools while avoiding foreclosure signs on front lawns is almost always a good thing. Modifying borrowers to buy time without addressing negative equity is rarely an optimal outcome. And maybe, just maybe, adjust tax incentives to take into account all forms of housing payments, not just mortgage interest.
*
I don't necessarily agree with the proposed solution, but at least it would be doing SOMETHING as opposed to nothing which is what is the current reality.
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