I will be the first to agree that the mortgage industry was extremely under-regulated for years and feel that lack of oversight, among other things, was largely responsible for the collapse of the housing market and subsequent financial crisis we now find ourselves in. But two of the most significant changes we’ve seen in years, both designed to protect consumers and reign in unscrupulous lenders, have done more to hamper the housing recovery than provide better consumer protections.
Mortgage rates rose another .25% over the last week and now stand at 5.75% for thirty-year fixed with no points. We are seeing some steadying, however, as the bond market appears to have stabilized and stocks have been flat for the last few days. With no large government bond auctions this week we should not see any further rate deterioration and rates could possibly ease slightly.
Fed Chairman Ben Bernanke has expressed frustration with the rising rates insisting that low rates are critical to a sustained recovery in the housing market. To that end, he and the Fed stand prepared to purchase billions more in mortgage-backed securities to drive rates lower if necessary.
On the economic front, the Commerce Department reported last Friday that new claims for jobless benefits fell in May by a much larger than expected amount though the overall unemployment rate rose to 9.4% – its highest level in twenty six years. While on the surface it may appear that losing 450,000 jobs in one month is a bad thing it indicates a marked drop in the rate of job losses and further evidence the economy is stabilizing.
On Tuesday, however, the government reported that wholesale inventories shrank to $405 billion, the lowest level since September, suggesting companies were adjusting inventories downward to offset further anticipated declines in sales.
One last note I reported on two weeks ago, HUD has now issued its final rule on utilization of the $8,000 homebuyer tax credit in conjunction with FHA insured mortgages. After first indicating they would allow for those funds to be used for repayment of a bridge loan to cover down payment and closing costs, HUD now has backed away from that plan fearing it carried many of the same risks as the now defunct homebuyer’s assistance programs.
HUD ruled that while the tax credit funds may be borrowed against for such things as closing costs, pre-paids and rate buy-downs, the borrower must still bring 3.5% of his or her own funds to the closing table. This is a hugely significant decision as the major hurdle most FHA borrowers and, indeed, most first-time homebuyers is lack of down payment. Many saw the use of the tax credit for down payment as a way of bringing an untapped segment of the population into the housing market and thus stabilizing the sector and overall economy.
To say 2008 has been a bad year for real estate is just a wee bit of an understatement. Property values have plunged by some 35% nationwide and foreclosures are expected to exceed 2.2 million for the year. Nearly 4% of all outstanding mortgages are currently delinquent and in Florida the rate of delinquent mortgages leads the nation at 7.82%.
The impacts of the sub-prime fallout, resulting credit crunch and global recession are all taking a serious toll on homeowners who often find themselves unable to sell or refinance as they owe more than their homes are currently worth. The Federal Government has made several impotent attempts to bring relief to homeowners and stem the tide of foreclosure and it seems more plans are bandied about almost daily.
So what options are available to struggling homeowners?
Early this year, the President announced an informal plan that brought together a coalition of banks, mortgage-servicers, credit counselors and investors to provide loan work-out solutions to borrowers facing foreclosure. The Hope Now Alliance, as it was called, was a non-governmental effort and since its inception has helped some 1.7 million homeowners through loan restructuring and modification. Unfortunately, the Comptroller of the Currency reported this week that, of all those helped in the first six months of the year, more than half were already back in default.
In July, The Housing and Economic Recovery Act of 2008 became law creating, among other things, the Hope for Homeowners program to be administered through HUD and offer a vehicle for borrowers who were upside down in the homes to refinance to a lower, more affordable interest rate. The plan, intended to help hundreds of thousands of homeowners relied on the current lien-holders of the properties willingness to write down the principal balance of the mortgage to 90% of the current market value. Second lien holders would have to also agree to re-subordinating their liens to the new first making them basically worthless.
As one might imagine, most lenders were reluctant and chose to pursue their own work-outs with borrowers on a case by case basis. As a result, only a handful of borrowers were helped by the plan. HUD has since revised the principal write down requirement to 96.5% of market value but still requires the borrower’s new payment be no more than 31% of their gross monthly income.
So what is on the horizon? Is there any real relief in sight for homeowners facing foreclosure? Several plans have been presented from a variety of governmental agencies but none yet have the full support of Congress and the White House. One plan offered by Sheila Bair, Chairwoman of the FDIC, would lower borrower’s rates to as low as 3%, extend the amortization period to as much as 40 years and defer a portion of principal to some future time.
Another plan proposed would have Fannie and Freddie offer a low fixed rate to both homeowners and buyers to not only help those with unaffordable payments but also generate demand for housing as buyers would presumably be drawn into the market – attracted by the lower rates. This would help stabilize home prices that ultimately are at the heart of the problem. The Obama transition team also is said to be working on a plan though no details have yet emerged.
So what help is there for struggling homeowners right now? Sadly, very little. The silver lining is that several robust plans that could have a real impact on the problem are being discussed seriously and the new administration will have the political capital to insure that whatever plan emerges victorious passes quickly. That is why Fannie Mae and Freddie Mac, along with Governor Charlie Crist, have placed a temporary moratorium on foreclosures until January. The hope is that by that time, after a new president is sworn into office and details of the plan are ironed out, there will finally be a real and workable alternative to foreclosure for millions of Americans.
To have any teeth, the final plan will have to contain several aspects of the plans already discussed. It will have to provide for a low fixed rate, a forty year amortization and some postponement and/or forgiveness of some portion of principal. It must also, and this is critical, offer the same terms to homebuyers with a minimum down payment requirement of 5% and a HUD backed mortgage insurance plan to safeguard banks so they will indeed lend. Without renewed demand for housing to stop home price decline, any new mortgage rescue plan will simply be buying time.
For this and more, visit my blog at www.activerain.com/blogs/hpalmer