“You’re not going to create jobs until you fix the economy; you’re not going to fix the economy until you fix housing; and you’re not going to fix housing without addressing foreclosures….” Kathleen Day, spokeswoman for the Center for Responsible Lending.
After returning from a two year sojourn to the Moon, the Obama administration has returned and has now decided to focus on jobs – housing will apparently come later.
On September 8, 2011, the President rolled out the American Jobs Act. While I believe jobs are critical to reviving our economy, they cannot be addressed without also addressing housing. Why? Because the housing industry, and its many related industries, is the engine that fuels growth, employment, and perhaps most important, consumer confidence.
So, in reviewing a transcript of the President’s recent speech, I wanted to see what he would propose for the moribund housing market. Here’s what he said:
“And to help responsible homeowners, we’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. That’s a step — (applause) — I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.”
Wait a minute! Out of a 34 minute speech, this 30-second sound bite is supposed to help fix the housing crisis? Without saying so, it sounded as if the President was referring to the old 2009 HARP program that was supposed to help four to five million homeowners. The real numbers show that only 838,000 borrowers actually refinanced, and of that number, only 63,000 had negative equity over 105%.
“HARP” is one of those government programs in which more time appears to have been spent dreaming up a title to create a catchy acronym (“Home Affordable Refinance Program”), than developing a program that could work. Over the last 2 ½ years, how did HARP fare? According to a recent article in the Wall Street Journal, not well:
“It hasn’t worked, to be honest,” said James Parrott, a top White House housing adviser, in a speech to industry executives this week. He said the housing market is at a “critical juncture” and policy decisions over the next six months could determine whether the economic headwinds are “going to be a blip or a broader struggle.”
It was apparent from the outset that HARP would have monumental problems to overcome. Perhaps the major one was that it was voluntary – not mandatory – on banks. I have no idea how an administration that follows rather than leads, will exert any real pressure on the Big Banks to commit to such a program.
Secondly, HARP is limited to loans purchased by Fannie and Freddie, i.e. “conforming loans” with standard 20% downpayments or mortgage insurance. However, it is undisputed that the lion’s share of the problem loans were the “non-conforming” type that were securitized through the private-label market, and carried little or no downpayments. [These included the 100% piggy-back loans with 20% seconds, ARMS, interest only payments, and a variety of other easy to get – but harder to get rid of – loans. When the housing market crashed, borrowers found themselves with 30% – 40%+ negative equity, wondering how long they could continue to afford paying for a depreciating asset. – PCQ]
It is a generally accepted fact that during the securitization frenzy of 2005 – 2007, the GSEs saw a precipitous drop in their market share well below 50%, while the private label market – with its permissively high LTVs – was booming. So for HARP to target GSE loans, and leave the higher risk and largest share of the distressed housing market to twist in the wind, is inexplicable.
Third, HARP focused only on the refinancing of first mortgages, not seconds. However, consent of the second mortgagees, whose security was the first to erode when homes began losing value, was necessary before the first could be refinanced. But since the second lenders had nothing to gain by consenting to retain their “unsecured” second positions[1], while the first refinanced, these second lenders became “spoilers” who refused to cooperate. Thus, the rather predictable outcome was that HARP could only be effective for borrowers with a single mortgage and at least some equity – which rapidly became a scarce commodity between March 2008 and today. Hence, at the outset, HARP was doomed to failure.
Until the President’s speech, I had assumed that the HARP program died long ago and had been mercifully buried in the Graveyard of Bad Ideas. So, after his September 8 speech, I was interested to hear what HUD Secretary Donovan had to say on NPR the following day. Perhaps the Administration had come up with some “fix”. After all, they had 2 ½ years to figure out why it didn’t work the first time. Here’s what Secretary Donovan told Robert Siegel, of NPR:
DONOVAN: “Here’s the issue, Robert. We’ve already been able to help almost 900,000 families refinance who are in that position. The problem that we found is as we put this effort, which we call HARP, into effect, what we found is because our mortgage system was so complicated, because we had sliced and diced these mortgages in different ways because we had one company servicing them and others that owned them, there are lots of barriers that are standing in the way of more families refinancing. Barriers like the risks of, what we call, put-backs or lawsuits that might come at the new lenders for mistakes that the original lenders made on the mortgages that we would refinance. That’s one example.
There are fees that have been applied particularly to the riskiest mortgages that stand in the way. We also have the problem that while your first mortgage may be able to be refinanced, you have a second mortgage, and that second mortgage holder has stood in the way of refinancing. Those are the kinds of problems that we’ve seen. So what the President said last night, he’s charged us in the economic team to work with these federal agencies, Fannie Mae and Freddie Mac, to break down those barriers.”
***
SIEGEL: Just to pursue that a little bit further, the Financial Services Roundtable, an industry group, told us in a statement that their members are committed to helping at-risk homeowners whenever possible. But one former Obama White House official, Peter Swire, said that the problem with second mortgages is that a lot of the banks keep them on the books. They haven’t sold them off and sliced and diced them. Those are real loans that they would write-off and take real losses on.
DONOVAN: Absolutely. But they have to recognize today that those loans are never going to be worth what they were originally made for. And, frankly, they have a much better chance of recovering on a portion of those loans if they can put that homeowner in a place where they can afford to stay in their home and afford their payments. And so we made progress on that, but we’re going to take additional steps through this process to push the banks and to get them on board and doing that.”
Whew! That’s a relief! I was afraid the White House had no real plan how to resurrect the HARP program so that it would now work…. Wait! They don’t! Everything Secretary Donovan talked about was what had made HARP a failure in the first place. What he said the day after the President assured everyone that refinancing was the answer was exactly what everyone already knew.
Refinancing, by itself, cannot work, and even if it did, it does not deal with the real housing problem, which is negative equity, and all of the associated problems it brings, such as mounting foreclosures. How many people with a mortgage at 125% of their home’s value want to refinance all of the negative equity? All that will do is bind them to the repayment of a loan that already makes no economic sense…especially if they have no confidence that housing values have stabilized – which they have not. [According to the RMLS™’ Market Action Report, Portland average home sale prices for August, 2011 were 9.2% less than the same month in 2010.- PCQ]
And connecting the dots from home refinancing to an improved economy, as the President did, [“I know you guys must be for this, because that’s a step that can put more than $2,000 a year in a family’s pocket, and give a lift to an economy still burdened by the drop in housing prices.”] demonstrates a gross miscalculation of the psyche of the American homeowner today. Many struggling Americans have been chastened after the profligacy of the past. It is doubtful that distressed homeowners will choose to refinance an undervalued home by an overvalued mortgage. Why chase a bad investment with a bad loan? Why not just let the loan default, get out of the overvalued mortgage and the undervalued home and move on?
Again quoting from the Wall Street Journal article referenced above:
“Lou Barnes, a mortgage banker in Boulder, Colo., refinanced four borrowers on Thursday into 30-year fixed-rate mortgages at 3.875%. ‘At this point, the only people being helped are those who need it the least,’ he said.
For the home-sales market, low rates will help make homes more affordable, but may not boost home buying if consumers are worried about the economy.
‘Today, the buyers’ concern is the falling value of homes,’ said Mr. Barnes. ‘I’ve had potential buyers say: ‘I don’t care if rates are zero if prices are going to fall again ‘
On September 9, 2011, Mortgage News Today reported the following:
“[FHFA Director Edward] Demarco was somewhat receptive, but carefully alluded to the fact that any restructuring of HARP would have to strike a balance between benefitting homeowners and preserving current levels of credit risk for Fannie and Freddie (collectively “The Enterprises”). [In other words, they won’t do it if it creates more risk, rather than less, to Fannie and Freddie. But how will buying loans for 125% or more of a home’s value, reduce their risk? – PCQ]
‘FHFA is carefully reviewing the mechanics of the HARP program to identify possible enhancements that would reduce barriers for borrowers already otherwise eligible to refinance using HARP. If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program’s intent of assisting borrowers and reducing credit risk for the Enterprises, we will seek to do so.’”
Not exactly a ringing endorsement of the Obama housing refinance plan. In fact, it sounds as if Mr. Demarco learned about this plan the same time as the rest of the country, and wants to take a wait and see approach. In other words, “Sure, we’ll consider it, so long as it doesn’t cost us any more money.”
On September 7, 2011, a day before the roll-out of the Obama jobs plan, the Congressional Budget Office (“CBO”) released a working paper titled “An Evaluation of Large-Scale Mortgage Refinancing Programs”. The report is 28 pages long, but worth the read. Here is a summary:
- A “well-designed and well-executed large-scale refinancing program with relatively broad eligibility criteria would have benefits…for borrowers with above-market interest rate mortgages….”
- However, it questioned whether a large-scale refinance program could be rolled out to the marketplace very quickly. [Given the fact that HARP has been a resounding failure for 2 ½ years with no improvement, one has to question the ability of this Administration to accomplish anything new with the speed necessary to actually help distressed homeowners today. – PCQ]
- A widespread refinancing program would not address one of the major problems facing the U.S. housing market – negative equity. With significant negative equity, simply refinancing at a lower interest rate might not provide sufficient relief necessary to avoid an eventual default.
- According to the CBO, here are some of the effects of refinancing with negative equity:
- It still leaves borrowers susceptible to delinquency caused by life events (such as illness, divorce, or short-term disruptions in income);
- It invites “strategic default” [A term I vehemently oppose, since most lenders require default as a condition to obtaining any mortgage assistance, modification or short sale approval. – PCQ]
- It restricts labor mobility for homeowners needing to move out of state for employment.
- The report noted that refinancing causes people to postpone selling their home for any reason. In other words, refinancing will do nothing for the stagnant home resale market.
- The report concludes that “…by waiving constraints on current LTV, any program that does not include principal forgiveness would not significantly address the problems associated with negative equity.” [Bold italics mine. PCQ]
[Note: The CBO report does not purport to evaluate the Obama jobs program or any specific refinancing program. It is a “working paper” only. It states: “Working papers are not subject to CBO’s regular review and editing process. *** This paper is preliminary and is circulated to stimulate discussion and critical comment.” PCQ]
Conclusion. A harp is a stringed instrument that most of us easily recognize for its majestic look and sound. While the lilting music of the harp is a thing of beauty, its HUD namesake, “HARP”, was actually a disconsonant, discordant, and wholly ineffective government program.
Accordingly, in the interest of giving the administration’s new program a less ambitious and more realistic name, let me suggest “Lowering Your Refinance Expectations”, or “LYRE”. It’s a cousin of the harp, just smaller, less pretentious, and with a more realistic name.
1] I say “unsecured” since the lien of the mortgage or trust deed has no home equity to attach to. It had vanished with the crash in housing prices. The reason consent of the second position lender was necessary was because when a lien is refinanced its original lien priority disappears until the new loan is placed on the property. But if there is a second lien, it will automatically elevate to a first position the moment the first lien is released – even for a nano-second. Thus, in order for a refinance of the first lien to be successful, the second lender must agree to retain its subordinated position behind the new refinanced first.
