EconoMonitor

Dan Alpert's Two Cents

The Housing Affordability and Stability Plan

Today’s announcement of aid to homeowners in order to reduce, or at least forestall, a rising wave of home foreclosures is welcome news for those able to benefit from the new initiative, as well as for the troubled US housing sector.    There are both positive and negative attributes to the plan, which we have outlined below.  On balance, however, the plan is a positive first step in stabilizing America’s housing market.

 

What do we like?

Obama’s plan targets responsible homeowners that are having trouble making their monthly payments or refinancing into new loans.  It does not target homeowners that did not or could not provide verification of assets or income, had blemished credit histories, bought more house than they could afford, or purchased expensive homes. Additionally, the plan calls for payments to reduce the borrower’s principal balance for borrowers that pay on time.   This is a real victory for responsible borrowers that are struggling to stay current on their mortgage, but have seen the value of their homes decline through no fault of their own.

The Treasury Department is increasing its funding in Fannie Mae and Freddie Mac from $100 billion each to $200 billion each, increasing the size of the agencies’ retained mortgage portfolios, and continuing to purchase Freddie and Fannie mortgage-backed securities.  These actions should shore up confidence in the mortgage markets and help maintain mortgage availability and affordability.  We do, however, encourage Treasury to nationalize these institutions.  If taxpayers take the risks, why shouldn’t taxpayers get the rewards?

Under the plan, servicers and investors will receive cash incentives for modifying loans and keeping them current.  This is a meaningful incentive for market participants, and should encourage institutions to work with borrowers.

As part of the broader Obama plan to stimulate the economy and stabilize the banking system, the program has many desirable features.  We applaud the administration for taking a three-pronged approach to the economic crisis – focusing on fixing banks, stimulating economic activity, and supporting housing.  In the current environment of global stimulus, we believe the overall plan will be effective (although it may need to be augmented over time).

The Housing Affordability and Stability Plan (HASP) provides a solid template for payment reduction – to reasonably affordable levels – on mortgage loans held by GSE’s and other government agencies (such as FannieMae, FreddieMac, the FHA, FHLB’s, etc) and those actually held on balance sheets by banks and other institutions over which the U.S. government now wields unprecedented influence.

What are our concerns?

Having noted the above, the HASP is beneficial as far as it goes.  We believe, however, that it will be palliative in nature, and the administration’s ability to stem further defaults and stabilize the housing market will depend on its various initiatives to work in concert with one another.

The President’s plan does not offer a workable solution for the millions of home mortgages that are owned in so-called “private label” securitization vehicles.  As alluded to above, this may have been intentional.  Many of the loans in these vehicles are mortgages that required no verification of earnings or assets (the so-called “liar loans”).  Others did not have sufficient down payments, were too large to meet agency standards had borrowers with weak credit histories.   Using government funds to help these homeowners is problematic, as it potentially equalizes support of less responsible borrowers (so this aspect is one that we both like and have concerns about).

It is important to note, however, that the privately securitized loans are the very sub-prime, Alt-A, Option ARM and jumbo-prime mortgages that are the most vulnerable to default.  More than $2.5 trillion (of nearly $11 trillion of mortgages outstanding at the peak of the bubble) fit into this category.  While the HASP provides for easy refinancing of many conforming loans controlled by the government or TARP funded banks (but not all, see below), the plan contains only a loss matching and incentive formula to encourage payment reductions by servicers on non-government influenced loans.  We believe the formula, providing for lender assumption of payment reductions down to 38% of monthly income and the government sharing in half of any payment reduction down to 31% of borrower monthly income will prove insufficient to overcome the reticence of trustees and servicers of private label trust-owned mortgages to take the risk of lawsuits from bondholders who object to the losses that would result from such modifications.  The stipends offered to servicers are but a drop in the bucket relative to the potential legal risks.  Finally, the $5,000 maximum principal reduction suggested by the plan in the case of successful modifications still leaves continuing re-default risk, as discussed below.

The HASP will not make GSE provided, low-interest refinancing available to any borrower who’s existing mortgage debt is more than 105% of the current value of their home without lender modification.  Millions of homeowners, particularly borrowers burdened by the above categories of non-conforming mortgages, have seen the value of their homes fall far below this threshold.  Housing values have already fallen by +/- 25% nationally and in excess of 40% in the most severely impacted markets.  Many analysts forecast as much as an additional 10% decline from present values.  Borrowers under the most abusive loans will therefore not be materially aided by the plan announced today.  Still, it is important to note that many long-time homeowners that have not taken cash out when refinancing should have no trouble qualifying.

Ultimately, relief to the vast majority of impaired homeowners will need to involve substantial principal reductions of what Moodys.com estimates will end up being 15 million seriously underwater mortgages (out of approximately 52 million total home mortgages in the U.S.).  While the government can provide some relief to borrowers under government controlled mortgages, the cost of doing so will be well in excess of the amounts proposed in the HASP.  As to those mortgages beyond government control – by definition the most underwater cadre of mortgages because of the near absence of down payments at the time of origination – even payment reduction (which will be not be a foregone conclusion under the plan) will not be sufficient to cause borrowers to keep paying on loans they can never get out from under.

We are uncomfortable with the administration’s plan to allow bankruptcy courts to restructure mortgages.  Aside from the legal and social issues related to changing, post-facto the enforceability of private contracts, we believe that this aspect of the bill could do more harm than good.  It is critical that mortgages become available on a more widespread basis, and allowing “cramdowns” of mortgages will make them less attractive for lenders to offer, thereby increasing mortgage rates and decreasing availability.  At the very least, there should be a requirement that any mortgage restructured by a bankruptcy court only be a fully-documented mortgage (borrower’s income and assets) that was truthfully applied for at the time of origination.

Westwood Capital has suggested for some time that mortgage restructuring needs to include substantial principal modification for the more troubled categories of loans.  Not to turn this into a commercial, but the ARC-Westwood Home Saver Fund is focused on acquiring and rewriting mortgages with this fact in mind.

With regard to the large number of loans trapped in private label securitization trusts, we have offered our Freedom Recovery Plan as suggestion of how to overcome this problem: (http://www.westwoodcapital.com/opinion/images/stories/articles_oct/the_freedom_recovery_plan.pdf)

A discussion of the legal issues involved in modifying privately held mortgages can be found in our report entitled Mandatory Mortgage Modifications and the U.S. Constitution: (http://www.westwoodcapital.com/opinion/images/stories/articles_oct/111508mandatorymodificationsandtheusconstitution.pdf)

13 Responses to “The Housing Affordability and Stability Plan”

GuestFebruary 18th, 2009 at 4:25 pm

A typical Fannie Mae conforming loan is very likely tobe fairly safe and targeting them as the responsible homeowners who should have access to low interest is fine. However it is in the Alt A, stated, subprime where the action is defaults. Your assessment of “Palliative” is an understatement. This is underwhelming and reminds me of the voluntary Frank/Dodd FHA 300 billion that allowed voluntary participation by the lenders and theyhad to take a 10% haircut. This bill whose name escapes me has not been a success. Where is that300 billion today?Obama should just tell the truth! If you screwed upand were stupid or avaricious enough to be conned, we won’t help you. We are going to let you make paymentlowering modifications with longer terms with thelenders and you can be a debt slave for being an idiot. You with option arm stated loans that are resetting can get a modification WITHOUT PRINCIPALREDUCTION. I personally don’t think the BankruptcyCramdown provisions will be passed in Congress.This preview also leads me to believe that the Financial Stability Plan that Geithner is formulatingwill stick the taxpayers hard. They will dress up thePig with some beautiful language, but the banks willbe in Moral Hazard Heaven. All of this is a far cryfrom the New Deal Home Owner’s Loan Corporation(HOLC).http://www.nber.org/books/harr51-1These 5 year modifications of interest are just kicking the can past the next elections! By that timethere will be people eating out of trash cans!

GuestFebruary 19th, 2009 at 12:39 am

In many non-recourse states, taking a refinance makes the new loan a recourse loan. With the talk about having new Freddie and Fannie being unforgivable loans, how will cram down be applied or can they be applied? Will further loss be essentially create modern sharecropper class in increasing debt to Freddie/Fannie for life?

GuestFebruary 19th, 2009 at 8:46 am

This is how the financial system really works–something which seems to be completely beyond the grasp of congress. A shadow banking system has grown up around the process of securitization, which packages pools of debt (mortgages, commercial real estate, student loans, car loans and credit card debt) and sells them as securities to foreign banks, hedge funds, insurance companies etc. Wall Street has muscled into an area of finance that used to be the domain of the commercial banks. According to Treasury Secretary Timothy Geithner, “40 percent of consumer lending” depends on this shadow system for credit. That’s why he is determined to resurrect securitization whatever the cost. The Fed has already expanded its balance sheet to $2.2 trillion while providing loan guarantees for over $9.3 trillion dollars. The entire financial system is now backstopped by loans from the Fed without which the global financial system would collapse. The present Fed funding of financial markets forces us to rethink our outdated ideas of the “free market” which now exists only in theory.A 40 percent decline in consumer credit is more than sufficient to push the world into another Great Depression. The sharp decrease in foreign exports, shipping, auto sales, and other vital areas of commerce–all in the 30 to 40 percent range–suggest that the global economy depends on Wall Street’s credit-generating mechanism more than anyone imagined. The breakdown in securitization has sent tremors across the planet triggering a decline in asset prices and an accelerating fall in personal consumption. Before the Fed and Treasury try to restore securitization to its former glory, politicians and pundits should decide whether it is a viable system for long-term growth. There’s reason to believe that transforming of debt into securities creates incentives for fraudulent loans and mortgages since they can be dumped on Wall Street and sold to gullible investors. The reason the mortgage lenders and banks bundled off crappy loans to the the big brokerage houses, is because they thought there was no risk involved. (for themselves!) They were wrong and now the entire market for structured debt is in a deep freeze. Geithner and Bernanke should suspend all funding for securitized loans until they can show that the kinks have been worked out and we won’t fall into the same trap again. One financial meltdown is more than enough.The TARP funds should not be used to exhume the corpse of a dysfunctional financial system. The money should be used to create more jobs, extend unemployment benefits, provide food stamps, public works projects or cram downs for struggling homeowners trying to avoid foreclosure. People don’t need more credit; they need debt relief. That means higher wages and better jobs. Obama should realize this, even if Geithner and Co. don’t. The Geithner-Paulson policy of limitless credit expansion is the path to ruin. That’s why Geithner is the wrong man for the job. His fundamental worldview leads to economic calamity.http://www.globalresearch.ca/index.php?context=va&aid=12340

TAFebruary 19th, 2009 at 9:22 am

Re-posts from other threads:”…two key elements are key to avoid a near-depression and still seriously missing: …and a more aggressive and across-the-board reduction unsustainable debt burden of millions of insolvent households (i.e. principal reduction of the face value of the mortgages, not just mortgage payments relief). Prof. Roubini 2/19/09Re-post from previous thread:As discussed here on several occasions, there is only one solution to ending the housing crisis – the elimination of “negative equity”. Everything else is window dressing.Plans relying on lenders’ voluntary principal reduction are fool hardy at best, and a complete waste of valuable resources at worst. It’s simply not in the lender’s economic best interest to voluntarily reduce outstanding principal.The plan unveiled today stresses affordability by manipulating the mortgage interest rate to achieve a desired payment (it’s too complicated to explain here, read it and set-up a spreadsheet model). It doesn’t make any provision for achieving parity between a home’s current market value and its mortgage principal balance. Without that, it’s DOA.But more affordable mortgages aren’t the issue; it’s which party incurs the loss in today’s “short sale” environment. Lenders won’t and sellers can’t so the R/E market remains seized.Make no mistake; the solution to the housing crisis will entail the elimination of “negative equity” by mandating the reduction of principal. There is no other viable solution. As others have noted, there will be no recovery without addressing the debt overhang (principal reduction not principal set asides).I can hear the screaming…moral hazard, legal precedent, rewarding bad actors…STOP! There is no other way out. The only relevant issue remaining is when. Hopefully sooner rather than later, as @ 10,000 homes go into foreclosure each day.Hide reply Reply to this comment By TA on 2009-02-18 16:51:07But this is only a temporary fix. The real issue is falling wages and, job losses.MarkHide reply Reply to this comment By Mark on 2009-02-18 23:47:01Mark,It’s a three legged stool; banking/finance, employment/income, and real estate. Advocates for each make compelling arguements for fixing their “leg” first.My point here is simple: there will be no economic recovery without first resolving the housing crisis, and resolving the housing crisis requires the elimination, not partition or set aside, of “negative equity”.Many advocate letting the market take care of itself, and I’m in complete agreement, to a point. Letting real estate prices find their equilibrium point (bottom) on their own is fine, but then what? The steeper prices fall, the wider the “negative equity” gap becomes.If lenders won’t voluntarily close the gap (i.e. incurring the short sale loss), and sellers can’t close the gap (i.e. marginal savings & retirement funds) the next viable agent is the federal gov’t.Everyone is looking for a bottom signal. IMHO, THE bottom signal to watch is how “negative equity” is resolved. Although it’s likely economic data will indicate otherwise, the “all clear” signal to watch for is the federal gov’t’s plan for eliminating “negative equity”.Reply to this comment By TA on 2009-02-19 07:06:33Before the legal beagles, finance wizards and general naysayers pounce, it’s understood the federal gov’t’s mandated reduction of mortgage principal is unprecedented (as best I can tell). However, it’s not only the ultimate “outside-of-the-box” solution, it’s the only viable solution.Reply to this comment By TA on 2009-02-19 09:17:40

SamFebruary 19th, 2009 at 1:07 pm

Mr. Alpert, I have read your “Freedom Recovery Plan” and it looks to me as something that is workable and reasonable. I am opposed to the plans that use taxpayer dollars to refinance and or reduce mortgage principal for people who didn’t use their common sense or just plain lied when getting their mortgage. I also don’t like the idea of using taxpayer dollars to bailout irresponsible and or unethical lenders, mortgage originators and Wall Street firms who securitized this mess. I do believe however that your plan addresses many of my concerns and limits the taxpayers involvement. We also need to change the whole structure of buying and financing a home. We must go back to making the people who write the loans being also required to hold them and take ALL of the risk involved. Home ownership is not a God given right, you need to save for a reasonable down payment and not buy above your means. Home ownership has become a casino and needs to return to being first and foremost a home and not a get rich quick scheme. We need to get the government out of and keep them out of the home mortgage business.

GuestFebruary 20th, 2009 at 6:20 am

Too much moral hazard here. Our first two houses, bought and sold in a 4 year period between 1989-1993 lost over $50k when commissions were factored.We just ate the loss, fortunately we had relo packages as job changes necessitated moves. However, the experience molded our housing purchases for the ensuing 15+ years. Conservative, but nice.Government bailouts and the perception that the housing industry is vital to our success as a nation is troublesome. We are built out, demand has taken a backseat to cram down housing.

GuestFebruary 20th, 2009 at 9:17 am

The way to eliminate negative equity is through foreclosure. The new buyers will have positive equity, and will have bought a house at a reasonable price they can afford. The old buyers will rent for a while (no one is going to be on the street), and later will probably buy a house they can afford as well. Maybe smaller, but that’s life.Reducing principal is a slap in the face of all renters and responsible homeowners.

AnonymousFebruary 25th, 2009 at 10:14 am

when homeowners are permitted to refinance under lower rates, are the homeowners still responsible for the high closing costs associated with refinancing?

GuestApril 16th, 2009 at 12:28 pm

I have the same question: Countrywide is saying that the closing costs are around 5200 and that the gov’t set these costs. I don’t think that is the case.Can anyone point me towards documentation re: who (govt or lender) sets such costs.

BossJune 8th, 2009 at 11:56 am

My home is not worth what I paid at the time I purchased it, now I have hard time paying the mortgage where do I go to refinance?

EscTechSiteJune 15th, 2009 at 12:10 am

Housing is not affordable because companies think they can get away with doubling or even tripling the price of a house. The funny thing is they are getting away with it. People are just getting morgages and are happy paying a monthly fee for their house, and don’t contemplate the actual cost. From EscTechSite