Government Mortgage Programs
Government programs aimed at refinancing mortgages for homeowners in negative equity are plagued with disappointing results, long-shot legislation and growing conflicts among regulatory agencies.
As of May, 2.1 million mortgages sat somewhere in the foreclosure process, according to Lender Processing Services. Of those delinquent home loans, 80% were in negative equity, meaning the borrower owed more on the mortgage than the property is worth. Of the seriously delinquent loans that were current just six months ago, roughly 6% had loan-to-value ratios of 150% or higher.
U.S. home prices have fallen 32% from their peak in 2006, according to the Standard & Poor’s/Case-Shiller index, but prices may not have bottomed. Robert Shiller, who helped develop the index, recently said prices could drop another 10% to 25%.
In response to the growing number of underwater borrowers, the Obama administration established several programs to urge investors toward writing down the principal on these loans. Each has underwhelmed because the two largest mortgage investors in the country, Fannie Mae and Freddie Mac, do not participate or cannot help homeowners with severe negative equity.
In September, the Department of Housing and Urban Development launched the $8 billion Federal Housing Administration Short Refinance program. Through it, underwater borrowers can refinance into an FHA-insured loan if the lender or investor writes off the unpaid principal balance of the original first-lien by at least 10%.
As of June, only 246 borrowers made it through the program.
One month after FHA Short Refi launched, the Treasury Department started a principal reduction initiative under the Home Affordable Modification Program. Participating servicers evaluate borrowers with a loan-to-value ratio of more than 115% for a reduction.
As of June, servicers included this write-down on 4,911 HAMP modifications.
In February 2010, the Treasury initiated the roughly $7 billion Hardest Hit Fit to provide Troubled Asset Relief Program dollars to state housing finance agencies. Some states including California and Arizona built principal reduction programs, but only Bank of America and Ally Financial agreed to participate and only under investor approval.
The Arizona Department of Housing expects BofA to reach up to 8,000 homeowners with the assistance with no estimate yet for California. Ally Financial has given no estimates.
The Home Affordable Refinance Program is by far the most successful. Since it launched in March 2009, more than 784,000 Fannie Mae and Freddie Mac loans pushed through the program and out of negative equity. But 84% of them held LTVs of less than 105%. Only 5,400 borrowers higher than 105% LTV underwater received help.
The ‘Boxer Rebellion’
Sen. Barbara Boxer (D-Calif.) introduced a bill in January that would eliminate upfront fees and underwater restrictions Fannie and Freddie include when evaluating a homeowner for refinancing out of negative equity.
The bill gained recent support from several trade groups and Moody’s Analytics Chief Economist Mark Zandi, who said the cost of the bill would be offset by the savings Fannie and Freddie would recoup by helping these borrowers avoid default.
But the bill has Wall Street jumpy. Analysts at Bank of America Merrill Lynch called the bill the “Boxer Rebellion” in a research note released Friday.
“Due to the existence of HARP and HAMP, programs which have performed well below initial expectations, the practical need for this new, seemingly sensible legislation is hard to rationalize. Why would this program have any more implementation success than its predecessor programs?” BofAML analysts said. “Sen. Boxer’s push for legislation to refinance underwater homeowners stands in opposition to perhaps the most pressing need of the U.S. economy and fiscal situation: reliance on, not help for, responsible citizens.”
Jaret Seiberg, an analyst at the Washington think tank MF Global said Friday the Boxer bill does not have the legs to wind through Congress. Even if it did, the prepayment risk could overwhelm the system.
With Boxer targeting roughly 2 million Americans with her bill, Seiberg said the paperwork needed could have the same damaging effects as the robo-signing disaster.
“Even if one could get massive refinancings, there is the question of whether the infrastructure could support such a move. We saw with the robo-signing controversy that the system could not handle the crush of record foreclosures. In our view, there would be similar problems if there was a crush of refinancing,” Seiberg said. “This would be a massive amount of paper to process at once and each loan would need to be recorded in a county clerk’s office.”
It appears two government agencies are sending conflicting signals to Fannie Mae and Freddie Mac on whether principal reduction even fits into their conservatorship roles.
When the FHA Short Refinance program launched in September, HUD said between 500,000 and 1.5 million borrowers who owe more on their mortgage than their home is worth would be able to refinance into a right-side-up FHA loan.
But HUD counted on two-thirds of that estimate on loans owned by Fannie and Freddie. As a result of these two firms missing from the program, only the 246 loans, mentioned above, made it through.
HUD said it is working to get Fannie and Freddie involved and is “getting the ball rolling” on the other one-third of the program’s targeted loans.
But the lack of participation from Fannie and Freddie is a directive issued by their regulator, the Federal Housing Finance Agency.
“FHFA understands that some mortgage investors have sought such solutions in order to recover today what principal they can on outstanding mortgages. However, I have determined that these programs as they work today, while they may be in the best interest of certain other mortgage investors, do not meet FHFA’s conservatorship goals,” said FHFA Acting Director Edward DeMarco in a letter to Rep. Brad Miller (D-N.C.) this year.
Out of options
Treasury Secretary Timothy Geithner admitted on last week’s Meet the Press that the Obama administration is running out of options to “engineer artificially a stronger recovery” in the housing market and overall economy.
Obama did say at the town hall hosted by Twitter last week that he would put more pressure on banks to pursue principal reduction as an option. But Seiberg said voluntary programs proved to be unreliable and going further would be an illegal breach of securitization documents.
“To make a real difference, the government would need to refinance all underwater borrowers at once to a lower rate loan,” Seiberg said. “Such a move would leave the government on the hook for billions of dollars in damages.”
BofAML analysts said Washington should instead be focusing on establishing a public-private partnership to invest in distressed real estate, citing the success Treasury had under such a program through TARP. But the analysts remained doubtful — given the current political gridlock on Capitol Hill — that anything could be done.
“Given the less than heroic nature of the budget debate so far, we are not hopeful that this will change anytime soon,” the analysts said.