An article New Year's day by Peter S. Goodman in The New York Times (here) discusses the Obama administration $75 billion MHA (Making Home Affordable) program. Bottom line, according to Mr. Goodman: It's an abject failure. He cites opinions of some economists and real estate experts that it has actually done more harm than good.
Some of the specific points:
- The program has raised false hopes in those who simply can not afford their homes.
- Banks are enabled in hiding bad assets.
- The bottom in the housing market has been delayed.
- Foreclosures are increasing and will continue to increase this year (2010).
- Many people trying to use MHA are simply wasting money prior to foreclosure.
- The goal of 3-4 million permanent mortgage modifications by 2012 appears very unrealistic.
A graphic accompanying the article illustrates some of the difficulties.
Click to enlarge
But the slow rate of implementation is not the primary problem. The entire program has been criticized for being a "payment reduction program" rather than a "principal modification program". If the principal on a mortgage remains far above current market value, the risk of default remains high. According to Goodman:
Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”
The Treasury Department started a new program in November apparently in recognition of the failure of MHA. This effort will pay incentives to mortgage companies that enable short sales and "key turn-ins" in lieu of foreclosure. In typical Washington spin, the Treasury commented on this new program:
Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”
There still appears to be no recognition that the housing market needs to clear. That will not happen until the books reflect true values. What we have now are millions of mortgages that exceed the market value of the property securing the loan. A majority of these are carried on bank books as "performing assets", ignoring the likely possibility that a significant number will default to foreclosure.
According to the Goodman article:
“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”
Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
The following table summarizes the numbers:
“Federal programs have not been successful and have done little about declining asset values,” Quigley said. “The probability that a renegotiated mortgage goes into subsequent default is substantially high.”
Well, the above numbers may be sugar coated. The Wall Street Journal (article by Mark Whitehouse here) reports that Deutsche Bank estimates that the number of mortgages underwater will rise to 21 million by the end of 2010. Whitehouse also reports that, as of November, 4.8 million mortgages were 3 months or more in arrears. With six million more mortgages estimated to go underwater in the coming twelve months, 6 million foreclosures may well be baked in the cake, with a larger number possible if the housing market does not start a significant price recovery in 2011 and 2012. Andrew Butter (here) published an estimate of 6 +/- million lost homes by 2013 in September, 2009. That still appears to be a good number. If there is an error in Andrew’s estimate, is likely that it is too low, based on the discussion below.
The total of auction and final foreclosure is approximately double counting the actual number of homes. If the lender were to bid in all properties, then the actual number of homes lost by mortgagors would be exactly ½ the blue total. However, some homes are bought at auction by third parties so the number of homes lost is something larger than half. Since the NAR (National Association of Realtors) has been reporting that approximately 30% of existing home sales were distressed properties in 2009, we can make an estimate of the actual number of homes lost.
Returning to The New York Times article (here), Congressional Oversight Panel Chairman, Harvard professor Elizabeth Warren posed a question, answered by Treasury Secretary Timothy Geithner:
It sure would be helpful if the Treasury Secretary had more of a clue than that.“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”
A good question, Mr. Geithner conceded.
“What to do about it,” he said. “That’s a hard thing.”
Disclosure: No stocks mentioned.
