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Obama's policy to help homeowners relies on the flow of money from taxpayers to banks "“ and unsurprisingly, it isn't working
The passage of financial reform is a good time to ask how much money we should expect to hand to the banks through our efforts to "help" homeowners. The basic story is very straightforward to anyone with more common sense than a Washington policy wonk.
The main homeowner helper story is of course President Obama's Home Affordability Modification Programme (Hamp). This programme involves payments from the government to mortgage servicers and investors in exchange for lowering mortgage interest rates, and occasionally, principal reductions.
Unfortunately, in the vast majority of cases the homeowner does not end up keeping the home even after entering Hamp. In most cases they drop out of a trial modification because they are unable to meet their payments even after receiving a lower interest rate or principal write-down. This means that they do not get a permanent loan modification and end up losing their home.
Through May, the treasury department reported that 340,000 of the 1.5 million homeowners who been offered trial modifications had received permanent modifications. Almost as many, 300,000 homeowners, never even started on the trial after it was offered. Roughly the same number of homeowners had their trial modifications cancelled before being offered a permanent modification.
Of course even getting a permanent modification does not guarantee that a homeowner will keep their home. Edward Pinto, an analyst who had formerly been Fannie Mae's chief credit officer estimated that 60% of the homeowners who receive permanent modifications will still end up losing their homes. Assuming that this number is overly pessimistic and only 50% re-default, then the number of homeowners who will ultimately be able to keep their home as a result of the modifications made through Hamp thus far is approximately 170,000.
If we assume that the total number will end up being three times this large (assuming Hamp continues operating through 2012), then 510,000 homeowners will have been allowed to keep their home as a result of Hamp. The projected price tag for the program is $50bn, which means that taxpayers will have spent almost $100,0000 for every homeowner who was able to keep their home through Hamp.
This is a rather steep price, especially since even many of the people helped still won't accumulate equity. They will just be allowed to stay in their home until family, job, or other factors lead them to move. They may still be stuck doing a short sale when they move or only getting enough from their home to cover the remaining mortgage and other sales expenses.
The limited benefit to homeowners from this programme would be of concern, except that we know that the money shelled out by the government went to investors and servicers (ie banks). And, as we in Washington know, money handed out to banks is always money well-spent, isn't it?
The flow of money from taxpayers to banks is not hard to recognise. It is easy to distinguish between helping banks and helping homeowners. Homeowners are helped if either:
1) Their cost of being a homeowner is less than or equal to the cost of renting a comparable unit; and/or
2) They accumulate equity in their home.
A serious plan for helping homeowners would have limited taxpayer dollars to modifications where 1) or 2) was likely to be the case. This would involve looking at factors such as price to rent ratios, a hugely relevant issue that never seems to come up in policy debates on helping homeowners.
The point is simple: if the ratio is high then homeowners would likely save money by renting. Furthermore, a high ratio is good evidence of a bubble, which would mean that prices would be lower in future years, guaranteeing that most homeowners will not accumulate equity before they sell. As it stands, the housing bubble has not fully deflated, so prices in many areas will almost certainly be lower in two to three years, guaranteeing that many current homeowners will never accumulate equity.
There are ways to actually help homeowners. Giving them the right to stay in their home as renters paying the market rent for a substantial period of time (eg five years) following foreclosure would be a good start. This route costs the taxpayers nothing and involves no bureaucracy. That makes it a complete non-starter in Washington.
The other easy route to helping homeowners is to require the Fed to pursue a policy targeting a modest rate of inflation (eg 3-4%). This would be a great way to ensure that house prices actually do rise. This would supply an enormous amount of equity to homeowners. If increased at a 4% rate over the next three years, as opposed to the current 1% rate, it would give almost $1tn in real equity to homeowners by reducing the real value of their mortgages.
Unfortunately, almost no one in Washington talks about this route either. They are concerned about interfering with the Fed's independence. After all, Greenspan and Bernanke have done such great things for the economy how can anyone suggest changes?
For now at least, we can only talk about helping homeowners if most of the money goes to the banks. Since we aren't actually helping homeowners with current policy, maybe we should just end the discussion and make the banks work for their money instead of relying on taxpayer handouts.
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19 Jul 2010, 7:17PM
Obviously he's only done it to help the banks again.
19 Jul 2010, 7:32PM
I think your article misses the real metric which a homeowner must consider: whether they are upside down on the value of the property vs. the amount owed. A host of people are now considering 'strategic defaults', or pushing their banks into a short sale exit.
I just went through a modification negotiation. The service company insisted on tacking the past-due interest onto a principal which was already upside down. The new rate offered is fantastic - two percent for several years - but the new principal is pure insanity.
Most people offered that sort of deal tell the bank to stuff it, or sign and then default again at a time convenient to them - probably when they land a job in another city.
In the four major Foreclosure States - CA, AZ, FL and here in NV - a vast number of homeowners are now upside down. The Federal program offers a principal reduction which cures only a fraction of that difficulty, not enough to cure it, and the conditions attached, exclude many people from participating.
Back to another problem: the modification negotiations are almost never held directly with the owners of the note, but with their servicing providers, who make money whether a foreclosure happens, or a modification. They don't give a flying rat's behind either way.
And labor mobility in the Sunbelt States is severely affected by this situation too. If people can only sell and move, to follow decent job offers, by undergoing a 'short sale' or defaulting outright on their mortgage, then the labor market has a real problem - and so does the banking system.
Defaults are soaring again, as the mid-00's marginal option-ARM mortgages reach their 'uptick' stage, and become unaffordable, as they always were.
The banks are already stuffed full of foreclosed homes - millions carried on their books - not yet returned to market. Their book valuation is a widespread source of fiction and the bank regulators must know it too. So they are accepting 'short sales' in larger numbers than ever. They have no choice, although they don't admit it.
For some real insights on all this madness, I suggest a peruse of http://ml-implode.com/
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