Builders and others in the housing industry certainly hope that the government’s “Making Home Affordable” plan announced last week stops the unrelenting numbers of home foreclosures and stabilizes the housing market.
But many in housing remain doubtful about the impact of the program on the housing market.
“I am pretty skeptical, because we are so far underwater here,” says Tom McCormick, president of Astoria Homes in Las Vegas, a city so hammered by the housing recession that Astoria decided to “hibernate” until new-home demand improves. “This is great if you have loan held by Fannie or Freddie and you are no more than 5 percent underwater, but in a market like ours, where there were so many high loan-to-value mortgages and prices have fallen so far, most people are too far underwater to get any help.”
Others see additional obstacles to the program’s success. “Most of the loans that are in trouble are securitized loans, not Fannie and Freddie products,” notes Rick Sharga, senior vice president at Irvine, Calif.-based RealtyTrac, which collects data on foreclosed properties around the country. “There’s no safe harbor [in this program] for servicers who have to restructure loans down to the affordability levels the administration wants.”
He also questions whether the financial incentives (see sidebar) will be persuasive enough to lenders and servicers. “Three thousand dollars [the amount available to servicers over three years as long as a borrower’s loan remains current] is just about what I’d pay a lawyer to prepare the paperwork for a lawsuit” from a mortgage security holder angry about a borrower’s loan modification,” Sharga says. “This is more comprehensive and less painful for the lenders [than the Home for Homeowners program], but the participation in that has just been abysmal.”
Hope for Homeowners, introduced in 2008, was created to assist as many as 400,000 homeowners by guaranteeing as much as $300 billion in Federal Housing Administration loans for financially troubled borrowers whose lenders agreed to participate. The effort, which required lenders to absorb considerable losses, has not been successful; according to Sharga, not one loan has been made in the six months since the program began Oct. 1, 2008.
So far at least, interest in the new “Making Home Affordable” plan has been high. “I hear the phones are ringing this morning,” Jay Brinkmann, chief economist for the Mortgage Bankers Association, said during a conference call last Thursday, the day after the initiative was announced.
Of course, it will be the execution of the plan—not merely the demand for it—that will matter the most. “If they really do something that allows people to stay in their houses, then it will make a difference,” says Christy Smith, president of Casas Del Oso, a luxury builder in Scottsdale, Ariz.
Still, she wonders whether such initiatives are worth the effort involved. “I have to wonder if we are just postponing things by rewriting these loans,” Smith admits. “I am conflicted, because I lived through this in the late 80’s. We had rising foreclosures, prices declined, but we came back. And I have no doubt that if we get this right or we just get out of the way, the market will come back again.”
Alison Rice is senior editor, online, at BUILDER magazine.
'Making Home Affordable': A Two-Pronged Approach to Averting Foreclosures
Overall, the Obama administration's "Making Home Affordable" plan aims to stabilize the housing market by both rewarding homeowners who have consistently made their mortgage payments by helping them refinance into lower-cost loans, even if their home values have dropped; and two, stop the wave of foreclosures by supporting loan modifications for financially troubled or at-risk borrowers.
The first part, designed for financially responsible homeowners, promises to make $75 billion available for those with loans owned or guaranteed by Fannie Mae or Freddie Mac who want to refinance (and theoretically reduce their payments) but cannot because their property’s value has fallen below the value of their mortgage. This part of the program will allow these borrowers to refinance into a 30-year fixed-rate mortgage worth up to 105% of their home’s value. The Obama administration estimates this could help as many as 5 million homeowners.
The “Making Home Affordable” initiative also includes $75 billion for loan modification, offering incentives to lenders, servicers, and borrowers alike to modify at-risk mortgages into loans that a homeowner can afford. This part of the program applies only to owner-occupied homes with conforming mortgages (i.e., no loans that exceed $729,750). Lenders will be responsible for the first level of the modification, adjusting a borrower’s payments so they are no more than 38% of his (or her) monthly income. The government will assist with the next step, matching payment reductions “dollar-to-dollar” to a mortgage payment that is no more than 31% of the homeowner’s income.
(Interest rates can go as low as 2% for these modified loans, which can offer these lower payments for as long as five years. After that, lenders may gradually increase the interest rates by 1% annually to no more than the conforming loan survey interest rate (i.e., the Freddie Mac weekly mortgage rate survey) when the loan was modified.)
To encourage people to participate, the initiative includes a host of incentive payments, such as:
• $1,000 upfront to servicers for every eligible loan that is modified
• $1,000 annually for as long as three years to servicers as long as borrower remains current on the new mortgage.
• $1,500 to mortgage owners and $500 to servicers for each modification on a current loan that is at risk of foreclosure
• $1,000 annually for as long as five years to borrowers to reduce their mortgage principal as long as they pay their loan on time.
The Obama administration estimates the loan modification effort could help between 3 and 4 million homeowners. “Hope for Homeowners,” a federal program introduced in 2008, was projected to assist as many as 400,000 financially troubled borrowers, but that initiative, which required lenders to absorb considerable losses in the loan modification progress, has not been successful.
Learn more about markets featured in this article: Las Vegas, NV.