As hard as they try, the banks and the Washington establishment seem unable to get a grip on a housing market that continues to spiral downwards. Delinquencies continue to increase while government programs intended to stem the tidal wave appear to be failing miserably.
First, consider this from the WSJ. It talks of the dismal results generated by the government’s HAMP program:
According to data released by the Treasury Department Friday, more than 900,000 borrowers have begun trial modifications under the program, but just 7% of them have received permanent changes so far.
Borrowers must make three trial payments and provide a hardship affidavit and other paperwork to receive a permanent mortgage fix. Many are still in the early stages and aren’t at risk of being disqualified. But thousands are at risk.
Wells Fargo & Co. said 10% of its mortgage borrowers who have made the required trial payments under the program haven’t provided any documents; another 15% have provided some, but not all the needed paperwork.
The administration last month gave borrowers who were current on their payments after at least three months an extension until Jan. 31 to provide needed paperwork. But the administration doesn’t plan to extend that deadline, Assistant Treasury Secretary Michael Barr said Friday.
“We are going to have further guidance for [mortgage] servicers at the end of the month,” he said.
What the Obama administration intends to do at this point in time is anyone’s guess. I think it fair to say that the program is not working and probably will not work. Clearly there is a factor or combination of factors at work here that is causing those in distress to turn away from what would seem to be a relatively sweet deal.
Again from the WSJ article:
About 25% of borrowers who receive trial modifications are expected to fall out of the program because they don’t make required payments, the Treasury Department said. For those who received a permanent modification, the median monthly payment dropped from $1,419 to $830, the department said.
“In a huge number of cases, the payment…is being reduced to or even below what a comparable rental property is likely to go for,” said Thomas Lawler, an independent housing economist. “Unless the borrower is materially upside down, there is a strong incentive to remain current.”
I suspect one could argue that even if the borrower is substantially upside down that if the new payment is at or below the cost of renting, remaining in the property is not necessarily a bad decision. After all, the homeowner would still potentially enjoy the tax benefits of making a mortgage payment, there is always the possibility that some period of high inflation could make him whole on his investment and moving entails both real and psychological costs.
So why are these individuals turning away from what might well be considered a good deal? Several ideas come to mind.
- Homeownership is not the ideal that many thought it would be. Absent big gains from appreciation, the entire experience is one they would prefer to not be part of.
- Staying in the home represents an unacceptable limit on mobility. Many of them may be coming to the conclusion that they need to relocate in order to secure good employment. Basically, they need to start over.
- Some are waiting for the government to sweeten the pot once more. They may believe (possibly correctly) that the next move will be towards mass principal forgiveness (note, presently principal modifications just defer the payment of a certain portion of principal) and are holding out for the better deal.
- Probably more than a few are just enjoying rent free living at the present time and will move on when the music stops.
- A fraction have already moved and the banks haven’t caught up with the fact that the house has been abandoned.
It’s likely that all of these factors and others I missed are contributing to the dismal results from the attempted fix of this problem. Realistically, we may just be getting another reminder that governmental fixes rarely work that well and the market ultimately sorts out the mess.
Now all of this would be dismal enough if we had just reached a point at which the situation was at least at a nadir. A column by Diana Olick this week indicates that may not be the case at all. She cites some statistics on Pay Option ARMs that indicate that long awaited body blow to the market is finally starting to bite as well as this bit of information on delinquencies:
Not soon after I saw that report, another flew into my “In” box from Fitch ratings: “Overall, prime RMBS 60+ days delinquencies rose to 9.2% for December 2009, up almost three times compared to the same period last year (3.2% in December 2008). The 2006/2007 vintages combined rose to 12.7% from 4.3%.” They’re talking about residential mortgage backed securities, which of course are pools of residential loans.
Then there was the report I received last night from Lender Processing Services:
“Total delinquencies, excluding foreclosures, increased to a record high 9.97 percent, representing a month-over-month increase of 5.46 percent and a year-over-year increase of 21.29 percent. Loans rolling to a more delinquent status totaled 5.01 percent compared to 1.52 percent of loans that improved. Of loans that were current in December 2008, 4.37 percent were either 60 or more days delinquent or in foreclosure by the end of November 2009, a rate higher than any other year for the same period.”
Clearly, the problem is not abating. It might, as she points out, be a function of joblessness more than unqualified borrowers but the result is the same. More people are unable to afford their homes and given employment opportunities in this country, there is little chance that there will be a quick turnaround in their ability to pay their mortgages.
One more bit of information from her:
All of this then piled on top of a number I noted yesterday, not newly reported, but new to me, that Experian was forecasting close to a million borrowers who could afford to pay their loans had voluntarily walked away from their commitments because they were so far underwater that they would not see any home equity any time soon. Judging by the fact that a quarter of all borrowers, or about 15 million, are currently underwater, that number will likely rise in 2010.
Rising delinquencies, strategic defaults, POAs hitting the fan; that’s a lot of headwind to sail against. It’s fair to say that the word recovery shouldn’t be bandied about when talking about the housing sector of the economy. Political considerations are going to cause the government to roll out more programs to try and stem the tide and their success will most likely mirror that of their predecessors.
The problem is that you’re fighting multiple factors that are contributing to the continuing malaise in the market, so that there really isn’t a magic bullet. Barring some sort of miraculous change in the economy and particularly employment opportunities, real recovery in housing is years away.