The White House left distaste in mouths of those in the housing industry when it revealed on Wednesday its $75 billon plan for dealing with the housing crisis.
After slashing the much sought after $15,000 tax credit for all primary residence home buyers to $8,000 for first-time home buyers only, the government has now released a plan that analysts say will do little to bolster the ailing housing market.
The two-phase plan seeks to refinance mortgages for 4 million to 5 million "responsible" homeowners and reduce payments for another 5 million "at-risk" homeowners through loan modifications. And while analysts say the plan won't completely fail, the likelihood of it standing up to its much-touted potential is questionable.
During a call on Feb. 20, Michael Rehaut, executive director and senior analyst for home building and building products at JPMorgan, pointed to company head of ABS Research Chris Flanagan's estimates to illustrate just how dire the need for an effective stimulus package is.
According to Flanagan's research, Rehaut said, "Foreclosure inventory should rise from roughly 700,000 at the beginning of 2009 to a peak of 1.8 million by October 2009, while cumulative foreclosures will total nearly 7 million by April 2011."
"We believe the administration's foreclosure plan will ultimately have only a modest positive impact against the massively large and complex quagmire of troubled mortgages," Rehaut added.
Said David Goldberg, analyst at UBS Investment Research: "Although non-distressed homeowners with LTVs in the specified range [80-105%] will benefit, we believe foreclosures among this group would have been minimal regardless."
Some even ask whether moving forward with this phase of the plan could potentially draw more negative market action.
"While we think the government is doing this in order to avoid helping those borrowers who engaged in the riskiest behavior during the boom years, this policy runs the risk of simply postponing foreclosures and dragging out the downturn," wrote Citigroup analyst Josh Levin.
From Ivy Zelman of Zelman & Associates: "We estimate that roughly 55-60% of home purchases are non-discretionary in nature, and by locking millions of homeowners into historically low mortgage rates, particularly those with the most equity, housing turnover may fall even further, delaying the recovery in demand and home values."
And when it comes to the loan modification portion of the plan, analysts have even more negative take-away.
"The program will ease foreclosures on the margin as the government program will be forced upon the TARP servicers," wrote Zelman. "But there is not enough incentive for servicers to pursue principal reductions."
Rehaut agreed and said that the slow pace at which government usually works as well as the less-than-enticing carrot of $1,000 per loan modification offered to lenders will prove ineffective.
"[Loan modifications] will likely fall solidly short as the incentives provided appear insufficient, in our view, to encourage a high level of participation by lenders, which we also note is voluntary," said Rehaut.
He also pointed to past failed attempts for modifications--the Hope for Homeowners program, as well as the redefault rate of other loan modifications reaching numbers up to 50% within 6 months of the modification.
UBS's Goldberg questioned the execution of the program, saying that while this loan modification plan has some degree of built-in incentives--more money goes to the lender if the borrower stays current and the loan is modified prior to delinquency--the complexity of the incentive structure will make it difficult to navigate.
Moving forward, housing market analysts are also concerned about the upcoming spring selling season, with Rehaut forecasting continued weak results due to the lack of consumer confidence, abolishment of seller-funded down payment assistance programs, and the failed $15,000 tax credit proposal. He does, however, point to the record length and magnitude of the current downturn as a relative positive, as it signals that the market should be close to an eventual trough.
"Critically, though, we believe a key historical relationship is that the stocks only trough, at the earliest, halfway through a recession," Rehaut said. "As a result, given today's large stream of foreclosures, rising job losses, and weak consumer confidence, we believe it is still extremely unclear when the economy will emerge from the current recession, pushing the emergence of a trough even further out."
Zelman, meanwhile, questioned whether the loan modification plan will shield loan servicers from investors, should they reduce the principal balance of distressed mortgages.
"The one aspect that remains unclear is the possibility of bank-cram down legislation making its way into law potentially including protection from investors for servicers that pursue principal reductions," Zelman wrote. "In the event that such legislation was passed and principal reduction becomes more prominent, we believe the tsunami of future foreclosures could be substantially mitigated."