Think of all the recent federal programs to keep people who can’t afford them in their four-bedroom houses.
There are the Home Affordable Modification Program, the Home Affordable Refinancing Program and the Emergency Homeowners’ Loan Program. In addition, there are Hope Now, Hope for Homeowners, the Hardest Hit Funds and, most recently, the proposal to expand HARP to distressed mortgages not covered by Fannie Mae and Freddie Mac.
-- Hopeless HAMP: The administration initially said this program would relieve 3 million to 4 million distressed homeowners, but it’s been a miserable failure. That was to be expected because loose-lending practices put many people in houses so unaffordable that, short of canceling their monthly mortgage payments completely, no modification would return them to financial health. About the only thing HAMP has done is delay foreclosures while lenders, under federal government edict, attempt to modify home loans to reduce total monthly payments on mortgage, credit-card and other debt to 31 percent of income.
Through December 2011, 1.8 million HAMP trial modifications had been initiated, but the monthly pace of new modifications continues to drop. Only 43 percent of the HAMP trials -- 762,839 -- made it to permanent status. Nevertheless, the administration still has hope for the program and has extended it through December 2012.
-- HARP and EHLP: HARP was initiated in June 2009 by the White House to aid 4 million to 5 million homeowners by allowing those with mortgages guaranteed by Fannie Mae and Freddie Mac -- which back almost half the $10.4 trillion of outstanding home loans and 87 percent of recent originations -- to refinance their loans even if they exceed the property’s value by 25 percent. Yet only 894,000 mortgages were subsequently refinanced. And even though Fannie and Freddie guarantee about 5 million underwater mortgages, just 70,000 of those refinancings were loans that significantly exceeded the value of the home. Undaunted, the administration liberalized HARP in November and extended it through 2013.
EHLP was set up by the 2010 Dodd-Frank financial reform law to help 30,000 homeowners by providing zero-interest loans of as much as $50,000, which could be forgiven after five years if borrowers stayed current on their mortgage payments. Despite the attractiveness of this offer, of the 100,000 troubled homeowners who applied for EHLP by the Sept. 30, 2011 deadline, only 10,000 to 15,000 are expected to qualify, meaning the program will dispense $330 million to $500 million of the $1 billion it was allocated.
Most recently, the Federal Housing Finance Agency extended HARP to the one-third of all mortgages not covered by Fannie and Freddie and that are instead owned by banks or grouped in mortgage-backed securities sold to investors. The new loans, refinanced at lower interest rates, would be guaranteed by the Federal Housing Administration.
The administration says the program could benefit 3.5 million homeowners in addition to the 11 million who could be helped by programs for borrowers with loans backed by Fannie Mae and Freddie Mac. But as with those efforts, this measure transfers money from mortgage holders to homeowners. The new program will cost $5 billion to $10 billion, which the administration wants to pay for by taxing large banks. Because this would require congressional approval, Republican opposition makes enactment highly unlikely.
-- Try, Try Again: And don’t forget the tax credit for new homeowners that was in effect from 2009 to April 2010, and resulted in a temporary increase in house prices. Many speculators were encouraged to conclude that the price collapse was over and bought foreclosed houses for a quick flip and lots of profit. But as prices fell again and turned expected gains into losses, those investors became landlords and rented their properties hoping that rents and appreciation would bail them out at some point.
Also recall the Fed’s attempts to aid housing by pushing down interest rates. When it cut short-term interest rates to 0 percent, not much happened: Banks were too scared and too restricted to lend, and creditworthy borrowers had plenty of cash and little interest in spending and investing in a very uncertain economic climate.
So the Fed moved to quantitative easing, buying huge quantities of securities. Those purchases provided money to investors in stocks and commodities in late 2010 and early 2011, but there was no multiplier effect. Banks didn’t want to lend the $1.5 trillion in excess reserves created in the process to any but the most reliable creditworthy borrowers, who didn’t want or need to borrow.
With the second round of quantitative easing, initiated in November 2010, the Fed also hoped to push down 10-year Treasury note yields, which would then push lower 30-year fixed-rate mortgage rates, to the benefit of homeowners. This moved the Fed beyond monetary policy and into the realm of fiscal policy, but maybe dire circumstances justified the resulting potential loss of the central bank’s independence.
Nevertheless, the Fed’s second round of purchases didn’t do much to revive house sales or prices. Mortgage rates are only one factor influencing housing activity, and their decline continues to be offset by fear of further drops in prices, high unemployment, strict lending standards, higher loan fees and underwater mortgages.
Yet just as the administration hasn’t given up on its failed attempts to aid housing, lack of success hasn’t deterred the Fed. It subsequently embarked on Operation Twist, selling short-term Treasuries and buying longer issues to push long rates lower without further bloating its balance sheet. And the Fed has hinted at further action if the economy falters this year, as I’m forecasting, perhaps by buying more mortgage-related securities.
-- The Courts: The third branch of government is also trying to keep homeowners in their abodes, especially those who can’t afford them. The Massachusetts Supreme Judicial Court recently voided foreclosure sales on two houses because owners of the loans couldn’t prove that the mortgages had been assigned to them before they were securitized. The frequent change of ownership in the securitization process led to sloppy paperwork with the names of the owners left blank.
In some so-called judicial states, such as Florida, New York and New Jersey, lenders have to go to court to be able to foreclose. This greatly increases the foreclosure time, to 986 days in New York as of the third quarter of 2011 and 749 days in Florida.
Washington’s efforts to reverse the trend away from homeownership and toward rentals will probably continue to be futile, even though the National Association of Realtors reported this week that sales of existing homes increased 4.3 percent in January, to a 4.57 million annual rate, the highest level since May 2010.
Rental apartments should continue to be an interesting investment area for years, as rising rents provide attractive returns. Single-family rentals may also be fruitful if the problems related to large-scale management of houses can be resolved.
(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. Read Part 1 and Part 2 of the series.)
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