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Housing Assistance 2012: Another Herculean Task for the FHA
Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives. Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury. I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process. They asked for comments and suggestions and reportedly received thousands of responses. They can now say we are implementing what America said they wanted. Of course, we do not yet know exactly how it will work.
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task. Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:
- If Congress will give FHA the authority to increase its current LTV caps.
- How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
- Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?
FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.” (Note: Congress might have an opinion here.)
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in. While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years. So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments? But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property? Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio. The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio. But they have been waiting three years for that to happen.
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region). That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle. Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.
Solemn Remembrance of Those Lost Aboard Shuttle Columbia
Like countless persons across the world, I watched in quiet disbelief as thousands of pieces of debris streaked across the vast Texas sky the morning of February 1, 2003.
Unlike what had transpired in 1986 during the launch of the shuttle Challenger, this time the shuttle Columbia was re-entering earth’s atmosphere. Traveling at Mach 19 at an altitude of 200,000 feet, the shuttle was only a dozen or so minutes from touching down at the Kennedy Space Center – where family and support personnel waited. Sadly, that landing never happened.
What also made this morning different for me was that I had taken over the White House Office of Cabinet Affairs only 10 days earlier. The Office served as a policy-coordinating body across the White House policy councils, in addition to its primary function as an early warning system for events transpiring across the Executive branch – including NASA.
Watching the events unfold on television, I knew to quickly head to the office as I did most Saturdays and not surprisingly my phone went off en route to the White House. I arrived at 10:00 and already meetings and conference calls related to the disaster were being scheduled.
There was no doubt that all aboard were lost – a point made crystal clear to us later that morning. A human simply cannot withstand the tremendous physical forces from a rapid deceleration of that magnitude. We also learned quickly that few nations have the capability to shoot down anything traveling at that altitude and speed, thus ruling out the possibility of an act of terror.
All we knew was that something had gone horribly wrong.
White House Chief of Staff Card entered my West Wing office early that afternoon and told me I was going to be the main point of contact for the White House for this tragic event and for the soon-to-be-announced accident investigation board. I wasn’t quite sure what that meant at the time but Mr. Card instructed me to get the NASA chief of staff on the phone.
That is when I first met Courtney Stadd – an impassioned public servant who had dedicated his life to the US space program. Courtney was amazingly patient with me and explained in great detail what protocols were already being invoked, as were dictated post-shuttle Challenger accident. Courtney was laser-focused on the families of the astronauts, as was all of NASA. Throughout the months-long ordeal of the accident investigation, Courtney worked diligently behind the scenes, focused at all times on the well-being of the families of the fallen astronauts.
Following a Homeland Security Council meeting that afternoon, a second meeting was held early in the evening among the various offices within the Executive branch, as we heard more about the soon-to-be-announced Columbia Accident Investigation Board and a memorial service at the Johnson Space Center later that week.
While it was not discussed that day, we also learned that, this time, the mindset of the public was questioning the American space program and, specifically, whether or not the risk of space flight was worth the reward. That was in stark contrast to the mindset post-Challenger accident, when the public was eager for the shuttle to fly safely again as soon as possible. This new mindset ultimately led us to chart a new course for NASA – a policy announced in January 2004.
But that was much later, as more immediate matters took precedent.
At the invitation of NASA, I attended the memorial service of Astronaut David Brown of Virginia. I had never met Mr. Brown, but you could not help but be in awe of his accomplishments, which were many. He was by training a medical doctor and was the first Navy flight surgeon to become a fighter pilot. He was also a college gymnast and had somehow managed to remain single. The similarities between the two of us were few and far between, yet as I sat only three feet from his flag draped coffin, I learned we were only a couple of months apart in age and both not yet married. And as I heard others tell his life story during the memorial service at the Arlington National Cemetery Chapel, I felt a sense of deep regret that I never had the opportunity to meet him.
Following the service, the coffin was placed atop a horse-drawn caisson for the mile long walk to his final resting place near the marble amphitheater. As we got closer, the crowd was 10 deep and I recall my amazement at seeing so many school kids who, I suspect, were there as part of a school trip. Here they stood by the hundreds, heads draped and hands over heart as the cortege moved slowly toward Mr. Brown’s final resting place. Many of them wiped away tears and occasionally cried aloud. Otherwise, there was compete silence except for the occasional plane landing at nearby Reagan National Airport.
America buried many heroes that day and this is only one of many stories to be told of sacrifice and duty to Country which in this instance includes India and Israel. I would hope that Americans remember them all, and on this -- the 9th anniversary of Shuttle Columbia’s tragic accident -- pay eternal solemn respect to the crew of her final mission: Commander Rick Husband, Commander William McCool, Commander Michael Anderson, Payload Specialist Ilan Ramon, Mission Specialist Kalpana Chawla, Mission Specialist Laurel Clark, and Mission Specialist David Brown. The words of President Reagan spoken many years ago are a fitting tribute to each of them: May God cradle you in His loving arms.
What Should the Government do to Address the Inventory of Foreclosed Properties?
Economists calculate that the decline in home prices has cost American homeowners approximately $7 trillion in home equity. Compounding this problem is the fact that the inventory of homes available for sale remains high and there is potential for a significant volume of “shadow inventory” to hit the market. Intervention is necessary to support the fragile recovery in the housing market and to prevent further declines in home values. What steps must policy makers take to prevent the loss of additional trillions in home equity?
The abundant supply of homes available for sale presents opportunities for first-time homebuyers and “move-up” buyers as affordability is at an all-time high. Many, however, are hesitant to make a move as they wait for values to reach “bottom.” Action is necessary now to establish a balance in the supply and demand for residential housing in America.
Public/Private Partnerships
Federal Deposit Insurance Corporation and the Residential Trust Corporation (FDIC/RTC) experience demonstrates that structured public/private partnerships can be successfully used as a vehicle to convey a large volume of assets of varying types and levels of quality to private-sector ownership and management, in a relatively short period of time, by appealing to a diverse group of investors who intend to employ geographically-targeted asset disposition approaches.
Applying FDIC/RTC experience to Enterprises and Federal Housing Administration (FHA) Real Estate Owned (REO)
As the strategy applies to the Enterprises and FHA, structured transactions would require joint ventures or partnerships between the Enterprises and FHA and private sector entities which are designed to facilitate the disposition and management of distressed real-estate assets.
The Enterprises and FHA make available for bulk sale all one-to-four unit single family homes and condominium REO inventory (properties may be tenant-occupied or vacant at the time of disposition). Bulk buyers are asked to construct custom REO pools (“Pick and Choose”) based on their specific investment objectives.
Once the investor completes the “Pick and Choose” process, the Enterprises and FHA forms an entity (to date, all Limited Liability Corporations or “LLCs”) to which a custom REO pool is conveyed. Under the structured transaction partnership program, the Enterprises/FHA act essentially as a passive participant or limited partner (LP), with a private-sector investor who is responsible for managing the assets and acting as the general partner (GP).
In exchange for contributing REO assets, the GP conveys a shared percentage of cash-equity (50/50 split, for example) ownership back to the Enterprise and FHA. The remainder of the purchase price is then financed through issuance of tax-free Housing Recovery Bonds. These notes would be issued by the LLC as payment to the Enterprise/FHA for the assets conveyed to the LLC by the Enterprise/FHA.
Planned use of properties, with a focus on maximizing returns under strategies tailored to local economic and real estate conditions.
Once assets are purchased by private investors, the use or disposition of those assets will be at the discretion of the buyer’s investment objectives within the constraints of Agency objectives. For example, in the hardest hit localities, where buyer uncertainty is most intense, it would be more appropriate to incentivize long-term ownership through “Rent to Hold” and “Lease to Own” structures. However, in areas where sales comparables are not greatly distorted by an oversupply of distressed assets, the Enterprises/FHA would better meet the stated objective of improving loss recoveries (ultimately improving overall execution as the program evolves) by incentivizing bulk investors who intend to “Rehab and Sell” real-estate assets to first-time home buyers and baby- boomers looking to downsize their housing needs.
Steps taken to ensure that the properties are well maintained and managed during the period they are rented or otherwise held off the market.
One potential option is for the Enterprises and FHA to partner with municipalities who designate dedicated coordinators or teams to inspect properties. In that scenario, states/municipalities would focus on aggressive code enforcement and nuisance abatement, as well as making it easier to reclaim properties by amending receivership and eminent domain laws to make them more effective for the current crisis.
Given the large number of REO properties, many of which have been on the market for extended periods, prompt rehabilitation is critical to maintaining a marketable property. HUD and FHA could also consider allowing investors to utilize the “old” FHA 203(b) and 203(k) programs – which were generally successful but ended in the late 1980’s -for the rehabilitation of single-family homes. Historically, these programs offered a practical solution for homebuyers looking to purchase a home in need of repair.
After a reasonable "first look" offer to owner-occupants, these FHA fixed rate 30 year mortgages could be made to investors to buy up the existing inventory. Individual investors, municipalities, and nonprofits represent a unique and underserved class of prospective homebuyers that require financing. Providing these groups with financing, especially rehabilitation financing like offered through the 203(k) program, would go a long way towards soaking up the excess inventory in the housing market. These investors are capital constrained and more inclined to creating bridges to occupant ownership over time through such mechanisms as “rent to own” programs. Without some sort of bridge or path to occupant ownership the Administration risks creating massive absentee ownership that could lead to
more blight and damage to communities.
Mr. President, it's Time for a National Housing Policy
Please Mr. President, enough with the one-off responses, it's time for a National Housing Policy.
The only thing more predictable than the fact that the President will deliver to Congress a State of the Union Address each year is the speculation that precedes it regarding what “Big” announcements the President’s speech will contain.
This year is no different, and a great deal of current speculation surrounds the topic of housing and whether the President’s speech will include some grand proposal intended to relieve those American homeowners who continue to suffer under the weight of a housing economy that remains stuck in neutral.
One plan getting a great deal of attention would involve the government granting debt forgiveness to borrowers whose mortgages are underwater, meaning that the amount currently owed by them on their mortgage exceeds the current value of their home.
To date, the Federal Finance Housing Finance Agency (FHFA) – the primary regulator of Fannie Mae and Freddie Mac – has resisted calls from Congress to approve principal forgiveness. In a report circulating today, we now understand why. According to that report, the cost of such a plan to Fannie and Freddie could well exceed $100 Billion! That $100 Billion would be in addition to the $151 Billion already owed by the two enterprises to the US Treasury. And to be clear, that means owed to US taxpayers.
Hopefully, current speculation is wrong and the President’s address includes no such proposal. Its not that we don’t sympathize with underwater homeowners, we most certainly do. We too look forward to the day when the American housing economy is once again growing and functioning well – and by extension, when the challenges facing homeowners are far less. When that day arrives, that will be a sure sign that the American economy generally has returned to a healthy condition.
Our objection is broader and goes to the fact that since 2009 the policy response to the housing crisis by the Administration has involved one tactical reaction after another – or as we have said before … “a series of one-off reactions …” and, unfortunately, little more.
And while certain tactical reactions were appropriate and even required in 2009 and even into 2010, the time is long passed for the development and introduction of a comprehensive National Housing Policy. Such a policy would lay out in clear terms the goals to be achieved through the Nation’s support of housing; the economic costs and benefits of such a policy; as well as the anticipated intangible benefits of such a policy. Finally, such a plan would identify the likely costs and risks of the failure to implement such a plan.
With such a plan in place (or at least proposed), the uncertainty that today plagues this industry would begin to lift and Congressional policy makers, regulators and business leaders alike would be better equipped to address the important considerations that must still be resolved if we hope to develop an enduring solution to the Nation’s housing crisis.
And for those who would ask, “Why should a housing policy be a priority?”, consider the following written in 2003 – perhaps the last time we had a legitimate National Housing Policy in this great Nation – by the Millennial Housing Commission:
“… housing matters. It represents the single largest expenditure for most American families and the single largest source of wealth for most homeowners. The development of housing has a major impact on the national economy and the economic growth and health of regions and communities. Housing is inextricably linked to access to jobs and healthy communities and the social behavior of the families who occupy it. The failure to achieve adequate housing leads to significant societal costs.”
Until these sort of deliberations and debate occur and a National Housing Policy is in place, it is impossible to know what we as taxpayers get (and give up) for another $100 Billion spent in this manner in support of the housing crisis.
It seems to us, that the time to answer the important question: “What do we get?” … before we give more … is long overdue.
Uncertainty 4.0: Will 2012 Exceed Our Low Expecations?
The noted science fiction writer Ursula K. LeGuin might have been referring to the present day when she opined that “the only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next.”
With all due respect to Ms. LeGuin, I think most of us have had enough intolerable uncertainty, at least when it comes to the state of our economy.
Markets and people hate uncertainty – especially in a prolonged circumstance. Short of a multitude of national disasters or, heaven forbid, another attack on our soil, there is no other singular issue that is negatively impacting almost every American family like our stagnant and uncertain economy -- fueled in large part by the nagging housing crisis. A crisis, I would add, that has many sub-sets.
Too many borrowers are burdened with mortgage payments that don’t realistically align with their homes’ present value. Beyond the current levels of REO, millions of homes are somewhere in the foreclosure process but have not yet reached the market. Some estimates put the number of homes in this category at more than 5 million.
Although some markets have rebounded slightly, no one is quite sure if next year will be THE year we officially hit bottom (Note: the preceding sentence has been written every December for the last three years).
Despite a favorable interest rate environment, many potential borrowers remain concerned about the anemic state of the economy and are hesitant to buy. In their recent mortgage activity forecast, the MBA believes that the 2012 origination volume will be at its lowest level since 1997.
And in the recent quarterly survey of homebuilders, more than half indicated they were putting their construction projects on hold until the market improves.
While some housing industry professionals and economists might call this good news, as we hopefully make a dent in the existing inventory, there is no mistaking the economic value homebuilding brings communities including jobs and tax revenue – which for too many communities has now become stagnant.
At a recent meeting of homebuilders and mortgage professionals attended by several government regulators, the builders expressed mild outrage at what they had been hearing from lenders – regulators were telling them to not do construction lending. “We’re dying out there,” was the comment from one homebuilder that elicited the longest pause of the discussion. The regulator’s “we’ll look into it” response, even extended in a sincere tone, did little to assuage their anger.
Affordable rental housing and community development advocates also have little to cheer about from the recently signed HR 2112 Minibus Bill, which cut HUD funding by $3.8 billion from 2011 levels. Among the programs cut were Section 202 elderly housing, HOME, and Section 8 vouchers. Presumably it could have been worse.
As we begin a new year we cannot help but wonder if 2012 will exceed our somewhat low expectations. There are some glimmers of optimism -- Fiserv recently reported that 95% of the close to 400 metropolitan areas will actually see an increase in house prices, although more than likely these increases will be measured in fractions of a percent. This is a reversal from the previous year, were most areas saw another house price decline. And most economists believe interest rates will remain low throughout 2012.
And who knows -- the Obama Administration might actually implement a program to unload some of the housing inventory to investors, provided there is an affordable rental component. They will certainly have political cover complements of the many responses they received from the FHFA, HUD, and Treasury RFI -- they could simply say they are implementing what housing experts and advocates have said they want.
While my crystal ball is somewhat occluded, I will offer that the last few years have brought new meaning to Ms. LeGuin "intolerable uncertainty".
Going forward, only certainty will relieve the anxiety of nervous first time homebuyers and move up borrowers.
Only certainty will bring private capital back to the mortgage market.
Sadly, the missing essential ingredient to more certain times is political urgency -- the type that would drive lawmakers to implement a clear, consistent, and compelling bi-partisan housing policy that focuses on affordable rental housing, sustained homeownership and private investment in America's mortgage finance system.
Refinance America: In Defense of American Capitalism
In Saturday’s New York Times, Martin S. Feldstein, in an Op Ed entitled “How to Stop the Drop in Home Values”, argues that continuing declines in home prices are at the heart of America’s housing crisis and can only be stopped through a government plan that reduces borrowers’ mortgage principal … “when it exceeds 110 percent of the home(s) value.”
Mr. Feldstein’s plan of government sanctioned loan forgiveness would neither stem declines in home values nor contribute in any meaningful way to solving the current housing crisis. Quite the contrary, such a plan would ensure the permanent demise of the American housing industry and threaten all consumer lending. Never again could lenders make mortgage loans to homeowners with the assurance that they would be repaid. No – if we adopted Mr. Feldstein’s plan – lenders would be forever at risk that the commercial contracts freely entered into between themselves and homeowners would be at risk of government-sanctioned contract abrogation.
Risk of default by homeowners due to all sorts of circumstances – death of a borrower, divorce, and other unforeseen events - is not a new business phenomenon. Such business risks are routinely accounted for by mortgage lenders and priced into the mortgage rates we all pay. However, government intervention of the sort proposed by Mr. Feldstein has never been anticipated as it is profoundly counter to the principal of sanctity of contract - the most fundamental principal of American capitalism and the system of American jurisprudence.
Not only would a plan of government-sanctioned contract abrogation surely contribute to a mass exodus of lenders’ capital from the mortgage lending industry, its impacts likely would extend well beyond mortgage lenders and would cause the cost of all consumer credit to increase dramatically. In the end, the home affordability index would decrease as a result of Feldstein’s plan due to higher interest rates - resulting in more not less – disruption to the housing industry and the economy generally.
Mr. Feldstein is correct on one important point, however. And that is that millions of American homes are unable to be refinanced – despite historically low interest rates – due largely to the fact that many of these homes are either underwater (meaning the current loans balance exceeds the current property value) or the home’s owners fail to qualify for refinance loans due to tighter credit standards. Read 'Refinance America'.
However, to Mr. Feldstein and others promoting principal loan forgiveness as the simple answer to America’s housing crisis, while I agree that the problem is serious and that the solution requires government intervention and support, I suggest we not sacrifice the systems of American capitalism and jurisprudence in the process.
Refinance America: A New and Improved Plan
Written By:
Brideen Gallagher
Vice President, The Collingwood Group
Brian O’Reilly raised some very intriguing propositions on dealing with the ever growing issue of borrower income/wealth trapped in deflated, under-water home values. While these ideas address each constituency impacted—borrower, lender, investor, taxpayer—there is still no evidence that the Administration, Congress or the regulators have any plans to address the current crisis.
Much has been made about the impact any mass refinance program could have on servicers and lenders, who would be deluged with new applications that they are not staffed to handle and, in this unprecedented low rate environment, not likely to prioritize. Let’s be honest—it’s much easier, and more profitable, to handle a “traditional” refinance than a refinance under the current HARP program. Also investors in MBS, who will experience prepayments at speeds they did not count on, may be wary of future investment in MBS if these programs can be changed on a dime. OK, say all of this is true. There is still a huge clog in the mortgage finance system and the tub is about to overflow. What about slicing off a segment of the most at-risk and underserved borrowers and launching a targeted campaign to offer these borrowers an option to take advantage of these low interest rates ? If it works, and in my opinion it will, it can be expanded to other borrowers as warranted, and could jump start the climb out of the economic morass where we now find ourselves.
As referenced in Brian’s posting, there are creative, viable private market solutions currently available that could be applied to a specific segment of the housing market that owes more than their home is worth but has been living up to their monthly obligations despite the hardship, and sometimes logic, of doing so. For example, borrowers who find themselves at 105%-125% LTV that are able are continuing to make payments, but no doubt are becoming more discouraged monthly by the fact that they are now, in effect, renters, but cannot “renegotiate” their “rent” and cannot walk away without devastating effects to their credit, not to mention their conscience. So here’s a new and improved plan :
1. Identify these borrowers in GSE/Ginnie Mae MBS and verify they have been making timely payments
2. Offer these borrowers an opportunity to reset their interest rate to a market rate plus some premium ( say .50%) by simply logging into a secure web based system and choosing rate reset option
3. Subsidize reduced payments (average of $250 per month) for a period of time, say 2-5 years, depending on the vintage of the origination.
Technology exists TODAY that can accomplish this in very short order. Yes, there is a cost to any subsidy, but it’s a small investment compared with the huge write-downs that could occur with any sort of principal reduction or true modification / refinance alternative.
Of course we can continue to do nothing, and run the (likely) risk that these borrowers will lose hope and decide to default, tying up the immediate “economic stimulus” of cash flow a rate reduction would give these borrowers to spend or put toward righting their equity ship.
With some political and regulatory will, this sort of initiative can and should happen. There is little ability, or incentive, for the GSEs to implement any strategic plan without the endorsement and direction of the regulator—FHFA. The newly formed CFPB should opine as well, as this is of clear benefit to consumers. Who else needs to chime in??