The government is in action on the home front, and in a strange way the result may be fewer foreclosures as well pressure to raise real estate prices.
The centerpiece of the new Administration’s efforts to save homes from foreclosure is the $75 billion Home Affordable Refinance Program (HARP). Begun in March, the program has quickly emerged as the largest government effort to halt foreclosures that we have seen.
Treasury spokesperson Meg Reilly tells us that as of mid-June nearly 200,000 people had enrolled in the program. Whether 200,000 people is a lot or a little depends on how you measure foreclosure progress.
For example, 200,000 is a vast number when you consider that as of June 1st only 945 people had applied for new financing under the Hope of Homeowners program. More amazing, only one H4H application — really, just one — had been approved.
The HARP application numbers are also huge when you look at the FHA Secure program, a federal plan that was supposed to “allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages.”
As of January 1st only about 4,100 delinquent conventional borrowers had been able to refinance under the FHA Secure program. Meanwhile, more than 300,000 foreclosure notices are now going out each month.
“The fact that some 200,000 people have applied for help under HARP is good news,” says James J. Saccacio, chief executive officer of RealtyTrac.com, the nation’s largest online marketplace for foreclosure properties. “But the real test is not how many borrowers apply, it’s how many will be able to avoid foreclosure in the coming months. If the program both enrolls lots of people and saves large numbers of homes then it will be judged a great success.”
HARP divides the world into two categories First, there’s a refinancing plan for those paying their mortgage on time but who cannot refinance to a lower rate because the value of their home has fallen. Second, there’s a modification plan for owners facing foreclosure.
We don’t know at this time how many of the 200,000 applicants seeking HARP help are current on their mortgages, however if many or most of the 200,000 enrollees are in danger of losing their homes then the HARP program may already be pushing home prices higher.
Huh? How is that possible?
Real estate is a commodity. Prices go up and down. Prices respond to supply and demand. With real estate there are various factors that impact demand such as mortgage rates (now ridiculously low), population growth (expanding, meaning more demand) and unemployment levels (more jobs equals more ability to buy, fewer jobs mean less housing demand). Given this capsule background, let’s look at those 200,000 HARP applicants.
The first part of the HARP program deals with refinancing. That sounds great but many if not most of the borrowers seeking to refinance will not get help. The reason is that the program is only available to those who have seen home values slip just a little. The White House explains it this way: “Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105 percent of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.”
While allowing loans to be refinanced in the absence of any equity is a huge stretch from traditional and prudent lending standards, many if not most people seeking to refinance won’t be helped under the current rules. Typical equity values have fallen so much that just about everyone is excluded from the refinancing portion of the program.
The Federal Housing Finance Agency reports that as of April, U.S. home values fell 6.8 percent during the past year and prices are actually 11.2 percent below their 2007 peak.
The situation in specific states and regions is even worse than the national picture. As one example, the Pacific census region — Hawaii, Alaska, Washington, Oregon, California — has seen prices drop 17 percent in the past year. For borrowers in these areas the possibility of HARP help is unlikely if not impossible.
If we can get distressed borrowers into modified mortgages that would potentially reduce foreclosure levels, at least in theory. In practice, a huge percentage of loan modifications quickly fail.
A Treasury report shows that 31 percent of all loans modified by Fannie Mae and Freddie Mac were 60 days late just three months after being revised. That means only one payment was actually made following modification.
The Treasury figures understate the re-default problem because the study only shows results for loan modifications. Most mortgage work-outs are actually payment plans, situations where a borrower can make up a missed payment over six months or a year. Add the make-up cost to regular mortgages expenses and the borrower’s payment increases under many payment plans, not good news for owners with financial problems.
Even when monthly payments are reduced they’re not reduced to zero. With growing unemployment numbers living paycheck to paycheck is no longer an option. Many of those who are unemployed will lose their homes regardless of any help they get through HARP.
Given the narrow opening provided by the HARP program you have to wonder how many of the 200,000 applicants will actually benefit. It’s plain that many will not qualify for relief and it’s equally true that many of those who get help will soon be foreclosed, so what’s the advantage to the program?
Many states are trying to get borrowers and lenders to avoid foreclosure and work out some sort of accommodation. One way to this is to have the borrower apply for assistance under HARP.
What’s happening while the homeowner is trying to work through the HARP process? Time passes. As time goes by homes which would have been foreclosed are in a kind of financial limbo until the owner is approved for help, not approved, re-defaults or is successful.
Meanwhile, the number of distressed homes available for sale is lower because potential foreclosure actions are in a state of suspension. Reported foreclosure numbers look smaller at any given moment because since March a large number of badly-delinquent home loans have not been taken over by lenders.
In the absence of a market where distressed homes can be sold for the value of their mortgage debt, lenders who might otherwise foreclose instead hope that borrowers get relief through HARP. If nothing else, HARP is a defacto mortgage moratorium, a way to keep the pot from boiling even hotter.
The result of HARP is a smaller inventory of lender-owned real estate. Fewer distressed homes for sale, less supply, means there’s some pressure to push up home prices, especially in the states and regions with the most foreclosure activity.
Every home we can save, every household we can keep from poverty and psychological disruption, should be seen as a victory. Unfortunately, in too many cases and even with the best of intentions, a large percentage of HARP applicants will find no shelter from the financial storm.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.