A fresh Congress has come to Washington and with it the thought that Uncle Sam should rapidly say goodbye, ta ta, and so-long to the foreclosure prevention business.
But if the federal government ends its anti-foreclosure efforts, what will be the impact on local real estate markets? Will there suddenly be more foreclosures and thus less pressure to stabilize and even raise home prices? Or will markets pretty much hum along without significant disruption?
In the past few years the government has spent more than $30 billion for loan modification and foreclosure prevention programs but the results have been mixed. Whether foreclosure prevention efforts are worth taxpayer dollars is a complex question for several reasons.
First, there’s no single modification program. Instead there have been several federal plans, some better than others.
Second, much of the money set aside for foreclosure prevention has never been spent and thus has not increased the deficit.
Third, virtually all prevention cash has actually gone to lenders and servicers, a back-door way to prop-up the troubled financial sector.
“There’s likely to be political deadlock because efforts to terminate foreclosure prevention programs by the House of Representatives are not expected to gain support from the Senate or the White House,” says Jim Saccacio, Chairman and CEO at RealtyTrac. “At the same time, new funding for such efforts is unlikely to be authorized. The result is that current foreclosure prevention efforts seem destined to wind down and wither.”
The largest federal program is HAMP — the Home Affordable Modification Program. When announced in February 2009, the Treasury Department said the effort would be funded with $50 billion from the government and $25 billion from Fannie Mae and Freddie Mac.
The biggest part of HAMP is the Making Home Affordable program. As of January MHA had produced almost 540,000 successful loan modifications — virtually all of which would have been lost to foreclosure without government help. Alternatively, more than 740,000 attempted modifications have failed.
HAMP has cost the government at least $29.9 billion. Much of the money has gone for incentive payments to servicers, mortgage subsidies and “protection” payments for lenders “to partially offset losses from home price declines.”
A typical borrower under MHA saves about $500 a month. This happens because the lender lowers the monthly cost of a loan to 38 percent of the borrower’s income by reducing the interest rate, stretching the loan term and sometimes by cutting the loan balance. The borrower then makes payments equal to 31 percent of household income. The lender gets the 7 percent difference between the two figures from Uncle Sam.
Impact If Discontinued: H.R. 839, the HAMP Termination Act, would end all new modifications under the program. The Congressional Budget Office estimates that if enacted the bill will result in 100,000 fewer modifications. Seen the other way, the proposed legislation will produce roughly 100,000 additional foreclosures with losses that will have to be absorbed by lenders and servicers.
If the HAMP cut-off is passed the White House has announced that the President will veto the measure.
Neighborhood Stabilization Program (NSP)
By a vote of 242 to 182 the House has passed HR 861, the NSP Termination Act. Under this program, $2 billion was allocated for use by local governments to buy and maintain foreclosed properties.
Impact if Terminated: Local governments have seen tax revenues vanish as a result of lower property assessments and fewer transactions. The real intent of this program is to raise local property values, increase property taxes and employ area residents. The multiplier effect is significant given that one dilapidated property can reduce the value of numerous neighboring homes and thus local property tax collections.
Much of the money originally set aside for the NSP has already been spent, therefore if termination is passed the impact will be limited to such funds as remain. The bigger impact comes from future funding, which will no longer be available.
HR 836, the Emergency Mortgage Relief Program Termination Act, would stop some $1 billion set aside for unemployment assistance. The legislation passed the House by a vote of 242 to 177.
Under this program, unemployed homeowners can get up to $50,000 in the form of a bridge loan. The loan is a non-recourse, subordinated mortgage with zero interest. In effect, an advance of sorts that’s recovered in whole or in part when the property is sold.
Impact If Terminated: This legislation could help as many as 40,000 unemployed homeowners nationwide if each received a $25,000 advance. If emergency mortgage relief to the unemployed is actually paid out the final cost to the government is unclear because some funding will be recovered when properties are sold.
FHA Short Refinancing Program
The House has passed HR 830, the FHA Refinance Program Termination Act, legislation that will end the FHA short refi program. Under this plan a borrower can refinance up to 97.75 percent of their property’s current value with FHA financing — if the lender will write off any unpaid balance.
As an example, if a home was purchased for $300,000 with 5 percent down the original loan amount was $285,000. If the property’s current value is $225,000 then the largest FHA short refi amount would be $219,937 — meaning the lender would have to accept a massive loss before the property could be refinanced.
Impact If Terminated: None. As of early March lenders had agreed to just 44 short refi loans.
Hope For Homeowners (H4H)
Under Hope for Homeowners the FHA has the authority to insure up to $300 billion in new mortgages. A qualified borrower with a toxic loan can refinance into an FHA mortgage — but only if current on the present loan and the lender agrees to a 10 percent principal reduction. In other words, the lender is being asked to take a loss on a performing loan.
Impact If Ended: None. There were 107 H4H loans in fiscal 2010 and 109 so far this fiscal year.
Announced originally in 2007, the FHASecure program was designed to allow delinquent conventional borrowers to refinance with FHA mortgages, especially those with toxic mortgages who faced suddenly steeper monthly payments when start periods ended. A total of 4,110 delinquent conventional borrowers refinanced under the program.
Impact if Ended: None. FHASecure folded in 2009.
In the end foreclosure prevention programs are both unlikely to be terminated and also unlikely to be continued. The result is that as existing programs close down, lenders will inevitably face an increase in foreclosures and larger losses — reasons why the entire issue may be reconsidered in the coming year or two.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.