What the HAMP series shows in excruciating detail is that the current set of procedures to reduce foreclosures and keep people in homes just haven’t worked for the vast majority of borrowers at risk. But what can be done to reverse this trend and achieve the following goals: 1) help borrowers, 2) clear the market and return housing prices to a sustainable level and 3) mitigate the overall financial risk to the economy. These are the near-term crisis points for housing, what hasn’t been resolved by focusing on anti-predatory lending laws or the future of Fannie and Freddie. So what’s out there?
• Government refinancing for underwater homeowners. The Treasury Department and HUD allocated about $3 billion a couple weeks ago for their “Hardest Hit Fund,” designed to help borrowers who are unemployed, with no-recourse loans and modifications. In addition, there’s a refinancing program coming on-line shortly that would be much broader.
The Obama administration on Tuesday will launch its most ambitious effort at reducing mortgage balances for homeowners who owe more than their homes are worth.
Officials say between 500,000 and 1.5 million so-called underwater loans could be modified through the program, the first initiative to target homeowners who are current on their mortgage payments but are at risk of default because they have no equity in their homes. Some experts are warning, however, that the same knots that tied up prior initiatives could do so again.
Under the new “short refinance” program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration.
This is probably as close to a Home Owners’ Loan Corporation as we’re going to get in the current Administration. Like that New Deal-era effort, the government buys up mortgages and refinances them for the borrower (though this is happening a bit in reverse).
The profile of an underwater borrower current on their payments describes many of the people who have contacted me – and reported their negative experience with the HAMP program. This $14 billion dollar program, paid with TARP money, fits their needs much better and could really make a dent, with principal reductions, in a lot of the negative equity out there in the country.
However, there are catches to what I believe is called HARP (Home Affordable Refinance Program). Once again, the banks or the investors in the mortgage have to be willing to write down the value. And loans held by Fannie Mae and Freddie Mac won’t qualify. This is an effort to reach worthless mortgage-backed securities held by investors and throw them out, essentially. If that can help the homeowner in the process, fine. The real problems are that the homeowner will have to take a ding to their credit rating for a principal write-down, and that investors may have legal constraints:
Moreover, investors may not be able to participate as hoped because certain contracts that govern mortgage securitizations say modifications can only proceed if there is an “imminent” risk that the borrower would default.
Reducing balances for borrowers who are current could open mortgage servicers to lawsuits from investors that hold the riskiest slices of bonds. Those investors would be wiped out if balances are greatly reduced. For that reason, “lenders are going to be especially reluctant to do short refinances on folks who are current,” says Alan White, an assistant professor at Valparaiso University in Indiana.
Here, government has a role to play. First, they can absolutely waive the credit reporting, it seems. The borrower did nothing wrong, stayed current, did whatever they had to do to make payment. Their house dropped in value through no fault of their own. Their credit should not take a hit. As for the contracts, and lawsuits, there’s $14 billion here that can be used to settle these cases, which would end up better for the investor than trying to sue to keep worthless pieces of paper on the books.
• Short-sales. HARP isn’t the only program out there, there’s also HAFA, the government’s short-sale program:
In recognition of the fact that some borrowers simply could not make payments even if the payment were lower, whether through job loss or a reduction in income, a more dignified exit strategy was created. HAFA offers a solution for those folks: short sale. It’s where the home is marketed and the lender agrees to accept the proceeds of a market value sale as satisfying the debt for less than what is owed. HAFA also offers a deed in lieu (DIL) of foreclosure, where the lender and borrower agree it would be better for both if the borrower deeds the property back to the lender, thereby saving the lender the time and expense of going through the foreclosure process [...]
If you find a buyer who is willing to pay the pre-approved price, which is not an easy task in this market, you proceed to closing which may take another 45-60 days and then the government will give you $3,000 to help you move. That’s a big win for the borrower as they have not been making payments for anywhere from six to 18 months. And the lender is prohibited from seeking the deficiency on the short sale. And your credit is not hit as hard as a foreclosure. And you get a $3,000 kicker.
This may work for a sliver of deeply indebted borrowers, though the fly in the ointment is trying to actually get rid of the property in this time of near-record lows in home sales.
• Bank/borrower equity partnership. Surya Yalamanchili, a Democratic Congressional candidate in Ohio’s 2nd District, has a unique idea to solve the problem:
Banks becoming equity partners with homeowners. Let’s explain that with an example:
Jim has a $100K mortgage from the bank for his $120K house. If the house is currently appraising for $75K, the bank would readjust Jim’s mortgage to $75K and take, say, a 20% ownership stake in the house. The result would be that Jim’s monthly payment would be substantially reduced and he becomes much less likely to “walk away” from his house. The bank has a loan which has immediately become more solid and, say, in 10 years when Jim sells his house, the bank, as a 20% equity partner, can share in the upside.
While the fine print still need to be worked out, this type of private-sector administered program actually cuts to the core of the issue and establishes the foundation for a sustainable housing market.
The problem of the banks not wanting to write down mortgages because they would reveal giant holes in their balance sheets could get counteracted by this policy, where they could still mark an equity stake.
• Right to rent. Dean Baker of the Center for Economic and Policy Research has been the main promoter of this idea, which would allow a borrower facing foreclosure to remain in the home by renting at market rates. This would add stability to the community, cost no taxpayer dollars and allow the bank to at least make something off the home rather than deal with foreclosure, while they retain ownership for the future. There are other benefits, as Baker says, along with the lawmakers who are actually carrying a bill to this effect in Congress:
“Right to Rent immediately gives the homeowner security in their home. They will be allowed to stay there for a substantial period of time, allowing their children to stay in their schools and families to prepare for and plan their future moves,” said Baker in his testimony on Wednesday. “Right to Rent also would make foreclosure much less attractive to investors. This gives investors more incentive to modify loans on their own, without the involvement of the government.”
The following day, “The Right to Rent Act of 2010” was introduced by Rep. Raúl M. Grijalva (D-AZ) and Rep. Marcy Kaptur (D-OH), which would allow homeowners whose homes have been foreclosed to stay in their homes at a fair market rent for up to five years. “The latest statistics on foreclosures and mortgage delinquency rates are an indication of the profound, historic crisis we face and the need for creative solutions like Right to Rent,” said Rep. Grijalva.
Fannie Mae initiated a trial right-to-rent program this year, which anecdotally has had a positive effect, though they won’t release the data.
• Cramdown. Allowing bankruptcy judges to rewrite the terms of primary residences in bankruptcy, just as they can for secondary residences, car loans, yacht loans and virtually every other asset, would have a salutary effect in rebalancing the relationship between the borrower and the lender. Loan servicers would have less of a choice in modifying mortgages and more of an incentive to do so on their terms, lest it be taken out of their hands by a bankruptcy judge. The Cleveland Federal Reserve Bank has produced research showing that cram-down works in precisely this way, by driving the parties involved to make loan modifications.
• Immigration. A new study out this week showed that expanding legal immigration would positively effect the housing market by increasing demand and stabilizing prices:
One major reason why housing prices remain in the doldrums and sales remain slack is that there are simply too many houses for sale. The National Association of Realtors reported that in July, there were 3.98 million existing homes on the market, representing a 12.5-month supply at the current pace of sales. That’s an exceptionally high number (a normal market has a six-month supply). Until hundreds of thousands of those homes sell, the market is likely to stagnate. So, goes the argument, let’s open the borders to immigrants who promise to buy a house. Every year tens of thousands more people apply for the highly coveted H-1B visas than receive them, and even the rejected applicants tend to be highly educated and highly skilled. Expand the number of visas granted, make them contingent on buying a house, and the newcomers will make a fast and substantial dent in the glutted market.
None of these efforts will necessarily solve this puzzle. Some of these programs would allow prices to fall to a sustainable level; others would simply prop them up. Some of these programs would help some borrowers, but there’s a class out there that have less hope; in particular, holders of second mortgages have seen reluctance on the part of the banks to deal with them at all. Second liens have far more value on the books of the banks than they can get after a modification, and they simply don’t want to take the hit. Some of these programs seem more tilted toward the banks and not community needs, which should be at the top of the list according to Eric Rosengren, president of the Boston Federal Reserve Bank.
But at the least, a combination of the best of these ideas could have a serious impact, not only for banks but for the people who have been savaged by them in the housing market.