As the Obama Administration’s Home Affordability and Stability Plan (HASP) enters its fifth month there appear to be more questions than answers on how the program is coming is coming along. In May, Treasury officials gave estimates on the number of completed home loan modifications done under the guidelines of HASP in the following order:
1) Over 55,000
2) Between 10,000 and 55,000
3) There is no precise data
4) We’re working on a tracking system
5) We’re still working to complete the tracking system
Despite the inability to build a tracking system, the same officials are boldly predicting that 20,000 loan modifications per week would be executed per before the end of the third quarter. As bold as the prediction is, foreclosures running at the rate they’re currently on would swamp the modifications by more than a 3 to 1 margin. At Moody’s economy.com, they’re predicting that seven million homes will go into foreclosure by the end of 2010. When estimates of 2.5 million foreclosures for 2009 were first announced, people were stunned. If Moody’s estimates play out, the country is looking at 4.5 million foreclosures next year, a number which will keep the economy on its back all by itself.
At the core of the slow uptake of loan modifications are the issues being faced by banks, servicers, and investors. The banks and servicers have been larded with government support starting with FSA/TARP funds and continuing with the incentive payments that serve as the keystone of HASP. Those funds have allowed the institutions to move away from the precipice they were looking at last summer while providing little motivation to dive headfirst into either modifications or foreclosures.
Despite the ramping numbers in foreclosures, they could actually be much higher if lenders foreclosed on properties where more than three payments have been missed. As the situation stands now, there is a backlog of approximately a million homes that have received notices of default but haven’t been sold at auction. In fact, only a small fraction of homes that could go to auction are actually submitted for sale. Part of the reason for that is supply/demand based; flooding an auction with homes is a sure path to disappointment at a time when even the limited supply of homes auctioned in June sold at almost 65% less than the value of the mortgage balance on the property.
The other reason that homes aren’t being foreclosed and loan modifications can’t seem to get completed is that both actions would require an updated valuation of the property and/or the mortgage on the books of the lender or investor. If REO properties in the banks’ portfolios were to be marked down to the level of sales at foreclosure auctions, many of the institutions would be wiped out. The same is true for mortgage holders. An across the board loss of 65% in these troubled portfolios would not only be devastating to the institutions directly, it would endanger the entire financial system, making inaction the easiest way to stay in business for another day.
While the stalemate may buy time while the institutions wait try to figure out a solution, it also extends the deepening problems plaguing the economy and will delay the possibility of any kind of recovery. At this point, the administration doesn’t appear to have an answer either. In the first major adjustment in the HASP guidelines, the administration broadened the availability of refinancing to homeowners with loan to value ratios of up to 125%. The change was questioned immediately on a handful of issues:
* The homeowners that could benefit from the change amount to only about 10% of those targeted for help.
* The homeowners that can take advantage of the expansion of the program aren’t the ones in dire need of help, i.e. those facing imminent foreclosure.
* The new refi’s look a lot like subprime mortgages with high LTV’s and a need for home values to increase for the loan to succeed.
It is possible that the answer to at least a few of the challenges lies in the most unpopular aspect (with lenders and investors anyway) of home loan modifications; principle reductions. The current statistics on loan modifications show that the ones that include principle reductions perform much better and go back into default at substantially lower rates. Additionally, the markdowns on valuation of mortgages related to principle reductions are much less than those on properties sold at auction. It’s a solution that provides a benefit to the homeowner by reducing the loan balance and a benefit to the lender/investor by preserving most of the value of the mortgage. At a time when wins are tough to come by, an answer that benefits both sides of the negotiation deserves a closer look.