by Jonathan Foxx
Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.
Commentary
Is it possible that just days from now a new era will begin in which negative equity will be forgiven and/or refinanced? Where politics and economics intersect, the unexpected can become the new normal!
I want to share some thoughts with you about the possibility - and, at this point it's still a rumor - that forgiving principal and refinancing negative equity are nearer than you think.
All the way back on June 23rd of this year - when Fannie Mae decided to cauterize the growing stream of strategic defaults - who would have thought that by early August both Government Sponsored Enterprises (GSE), Fannie Mae and Freddie Mac, under Treasury's conservatorship, would actively consider ways to provide negative equity refinance, let along offer forgiveness of negative equity?
Less than two months later, the GSEs along with the involvement of the Federal Housing Administration (FHA), are going forward with such options: permitting borrowers to refinance negative equity became a reality on August 6, 2010; and somehow extinguishing negative equity altogether - though still publicized in whispered rumors and political trial balloons - seems to be a forthcoming initiative!
This comes also at a time that Freddie reported "a net loss of $4.7 billion for the quarter ended June 30, 2010, compared to a net loss of $6.7 billion for the quarter ended March 31, 2010," and the Federal Housing Finance Agency (FHFA), the GSEs' regulator and conservator, requested another $1.8 billion from Treasury, and Fannie reported "a net loss of $1.2 billion in the second quarter of 2010, compared to a net loss of $11.5 billion in the first quarter of the year" - and the FHFA requested another $1.5 billion from Treasury.
The so-called "third rail" of housing policy - the Fannie and Freddie debacle - is a persistent dilemma.
With an estimated 15 million mortgages, or 20% of all mortgages, now underwater with negative equity of nearly $800 billion, the Obama administration may now be poised to order the GSEs to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth, but who are nevertheless current on their mortgage payments. In theory, this tactic would put hundreds of dollars a month into the pockets of some of these borrowers. Notwithstanding the obvious political implications within three months of the mid-term elections, this can hardly be considered a bail-out of Main Street - which needs only one thing to pay mortgage payments: income from jobs! And unemployment persists in double digits, including a hiring environment of five to six applicants for every job opening. What is obviously needed is jobs, jobs, and more jobs!
But the stimulus funds are depleting, and the Administration finds itself with fewer options.
A quick back-of-the-envelope calculation shows that there are about 77 million people in the U.S. who are homeowners and the civilian labor force is approximately 154 million. In other words, forgiving negative equity would clearly help a sizable percentage of the homeowners, but that's really just about half of the people needing income or a job or better wages to even afford monthly rent, let alone payments on their mortgages. Thus, realistically, this could hardly be considered a stimulus for Main Street.
I have argued previously both here, here, here, and here, and elsewhere in print, that the HAMP program is obviously failing or certainly not measuring up to the goals set forth by the Obama Administration. The FHA Short Refinance, announced on August 6, 2010, can hardly be considered to offer a robust fix, even if it means negative equity refinance - because the program itself contains the kinds of unlikely eligibility requirements and lender cooperation buy-in that has tanked other government programs, such as the Home Affordable Refinance Program (HARP), which to date has only a small percentage of homeowners.
So, is this the hoped for answer to "strategic defaults" and a special stimulus for Main Street?
I think Barron's has it right in their article, entitled Mortgage Forgiveness? Forget It:
Suddenly changing to make it easy to refinance, either through principal forgiveness or lowering lending standards for Fannie and Freddie, would cause chaos in the mortgage-backed securities market. The Fed, with a massive MBS position, would be a big loser. So would be Fannie and Freddie. And that ultimately means the American taxpayer.
Moreover, a plunge in the MBS market would mean huge losses for other investors, including those with stakes in mutual funds with big MBS exposure. And a plunge in mortgage securities prices could wind up pushing up mortgage rates in the end, conceivably pricing out some prospective buyers trying to get their proverbial foot in the door of their first house.
And politically, it could backfire. There could be many more folks resentful that they couldn't get a special deal to reduce their mortgage because they did the right thing - put down an ample down payment on a house they could afford with a margin of safety.
This is one deus ex machina that won't fix much. As one of my favorite clients likes to say, that dog won't hunt!
Comments or Questions?
I would welcome your comments or questions.
Please feel free to email me at any time.
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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.
