Well, not surprisingly the Obama administration refuses to listen to me and instead of just letting the housing market work through its pain, they have come out with yet another “fix”. This one involves some enhancements to HAMP in their never ending search to establish price stability for the market and validate the fiction that hundreds of billions of dollars of bank assets are indeed real.
Having nibbled around the edges of principal forgiveness in previous incarnations the administration is, if not going all in on that strategy, at least moving it to the forefront. And, lest you think that they’re only worried about borrowers with nasty option ARMs or those more conventionally underwater, now anyone who is struggling with their mortgage due to unemployment is going to get thrown into the eligibility pool. I’ll lay great odds if anyone wants to take the bet that all you have to do is show up and say you can’t pay and you get to take part in the giveaway.
The temptation here is to listen to the political rhetoric and assume that this is all about helping the working poor get through a rough patch. This from Keith Hennessey’s thoughts on the initiative provides a useful reality check:
These programs are targeted at homeowners who could almost but not quite afford their mortgage. The idea is that, with some taxpayer subsidy, their lender will agree to reduce or delay some mortgage payments.
Who is eligible? Under one program, called HAMP, the Home Affordable Modification Program, you are eligible if you:
… live in an owner occupied principal residence, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners.
Excuse me? We’re going to subsidize someone with a mortgage balance of $700,000?!
(Updated: A knowledgeable reader thinks my 5.25% interest rate was unreasonably low, so I’m changing the example to assume a 7% rate.)
Let’s do a quick back-of-the-envelope calculation. Suppose you have a mortgage balance of $700K, with 28 years left on your 30-year mortgage at a fixed 7% 5.25% . Your monthly mortgage payments would be almost$4,800. If that’s greater than 31% of your income, you make less than $186,000 per year.
Does it really make sense for the Administration to use taxpayer funds to subsidize someone making less than $186,000 per year to stay in a home with a $700,000 mortgage balance?!
Funds for this program – $50 billion is the walking around figure – are coming from TARP. One is tempted to ask how they can justify spending money allocated for bank bailouts on foreclosure remediation but if you think about it, it makes perfect sense since in this is essentially an extension of the bank bailout. The banks are holding massive amounts of worthless mortgage paper, but you can’t politically shovel more money directly to them if they write down the value of those assets. So make struggling homeowners the conduit which you use to affect the transfer and hope that the effort props up prices long enough to avoid a deadly reckoning.
There are more than a few problems with all of this:
- There is a real risk that artificial stability cements homeowners in their current residences and thus eliminates the dynamism of the residential real estate market. The cost of price stability is a market in which homeowners are so tied to their properties that move-up purchases become the stuff of history.
- Many of those underwater or struggling with payments due to employment issues might well see their long-term economic situation improved by moving down in the housing market. Reduced housing expenses and/or the ability to relocate to areas with better employment opportunities is in the best interest of a lot of current homeowners. The new programs encourage false hope in lieu of coping with hard realities.
- As Barry Ritholtz notes, the government programs by seeking to establish what might be an unreasonable level of home prices are disenfranchising an important group of Americans. Those who may just be starting their adult life and have been saving for a home or who would benefit from the lower rental rates that come with lower home prices are being punished in favor of saving the profligate.
Once the politicians decided that the housing crisis deserved to be included in the theory that nothing bad should ever happen to any American there was never going to be any turning back. This latest version of saving the American homeowner will likely not be the last. It will probably not meet with much more success than the previous efforts but, in that case, will be followed by a new enhancement requiring even more money. In the process, the recovery of the residential real estate market will become a decades long ordeal when it probably only needed to be a struggle for a few years.