Boom or Bust?

COMMENTARY

Jonathan Foxx

President and
Managing
Director

There is an astonishing contrast regarding the condition of the housing market as depicted by the FRB, the Obama Administration, the ratings agencies, and many real estate and mortgage industry resources. 

If you feel a sense of confusion, perhaps it is because the differing views are like a patchwork quilt of political posturings, actual financial data, and too many opinions.

Housing Finance

Today, June 9, 2011, Standard & Poor's will hold a meeting in New York City, entitled Housing Summit 2011: Boom, Bust, & Beyond. It is all sold out.

The meeting will cover affordable housing, housing finance reform, limiting the government's role, government-sponsored programs, and insurance enhancements. The principal speaker will be Valerie White, S&P's Senior Director and Analytical Manager, who is an expert in the financing issues involving the U.S. affordable housing market in the aftermath of the 2008 housing bust. If you will not be attending, here is her view.

Essentially, Ms. White believes that interest rates, among other factors, are the most significant challenge still facing low to moderate income borrowers, because lower rates put credit pressure on bond programs.

What is Affordable?

While I think S&P's view is worth considering, I'm not so sure the housing market's sorry condition results from merely an interest rate issue. I realize that affordable housing is only one bell weather, but it is important and, in many ways, S&P's observation may be generalized to many aspects of the housing finance market.

Upside Down

It is one thing to have a large supply of foreclosed-on houses, or rate arbitrage issues, but it is quite another when millions of mortgaged houses are underwater. Negative equity - or, now its new sibling, "near-negative equity" (for less than 5% equity remaining in the property) - are riotously rampant, like a forest fire out of control with no fire fighters in sight.

Who does not know that negative equity occurs because of a decline in value, an increase in mortgage debt, or some combination of both?

CoreLogic issued a report for the first quarter 2011, released yesterday, in its ongoing series about negative equity. The report shows that 10.9 million (22.7%) of all residential mortgaged properties were in negative equity at the end of the first quarter of 2011, and an additional 2.4 million borrowers had near-negative equity.

Together, negative equity and near-negative equity accounted for 27.7% of all residential mortgaged properties!

By the way, that statistic has gone down infinitesimally: in the fourth quarter 2010, these two categories stood at 27.9%.

The Real Picture

I'll let CoreLogic's chart tell it like it is:

New Analysis Highlights The Role Of Home Equity Extraction In Negative Equity Risk
Page 4, 6/7/11, CoreLogic

Praising Limited Progress

Yet we continue to hear glowing reports from the Obama Administration, especially regarding the HAMP program, such as:

• "The Administration's efforts have helped millions of families deal with the worst economic crisis since the Great Depression."

• "Tens of thousands of new homeowners continue to receive real payment relief from HAMP every month."

• "Mortgage delinquencies continued a downward trend compared to early 2010 and foreclosure starts and completions remain below peak."

I have written extensively about the failure of HAMP, so I will not revisit my concerns. 

Please visit the Commentary section of our Archive to read my comments.

Positive Economic Growth or Negative Equity Growth

Negative equity is a critical indicator. Borrowers in negative equity positions may be willing and able to pay their monthly mortgage payments, but they are probably also enduring income shock, whether it be caused by loss of a job, divorce, or death - and, these borrowers continually are on the precipice of foreclosure and short sale.

High rates or low rates, the negative equity condition is not improving much at all. In fact, it has yet to crest.

If you want to believe the FRB, economic growth may be temporarily stalled, but will soon turn around. Economic recovery is just around the corner, or maybe the next corner. Obviously, a sustained growth in the economy will mitigate risk and bring down the negative equity condition as well as offer strengthening to borrowers' incomes.

But for the mortgage industry, negative equity and near-negative equity should be considered leading indicators, foretelling the presence or absence of any possible recovery to a robust housing finance market. Their very existence depresses sales and debilitates refinances.

If rates were the issue, the mortgage market would have long since revived!

What do you think?

I would welcome your comments.

Please feel free to email me at any time.

Obama's "August Surprise"

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.