More Extend and Pretend: HUD Offers $1 Billion of Subprime Teaser Loans

The latest stunt from the Obama Administration on the housing front is a peculiar bit of theatrics at the margin. As Bloomberg reports:

The Obama administration will offer $1 billion in zero-interest loans to help homeowners who’ve lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas.

The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” to make mortgage, tax and insurance payments for as long as two years, according to a statement released today. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement.

The initiatives will help “a broad group of struggling borrowers across the country and in doing so further contribute to the administration’s efforts to stabilize housing markets and communities,” Bill Apgar, HUD’s senior adviser for mortgage finance, said in the statement.

Yves here. When you read further, the measure is designed to target unemployed workers. So let’s parse this:

1. $1 billion is chump change as far as the overall problem is concerned. If you assume loans at the maximum level ($50,000 per person), that’s 20,000 borrowers; at a more likely $25,000 per borrower, it’s 40,000. By contrast, RealtyTrac expects an increase of foreclosure filings of 1 million for 2010. Admittedly, RealtyTrac’s methodology notoriously overstates activity (it counts every filing, not every foreclosure), but a good rough cut is three filings per every foreclosure. So the Obama measure at best provides aid to less than 1/6 of the total incremental foreclosures, coming on top of a high baseline.

2. How is this supposed to help borrowers? Seriously. This is the government equivalent of a subprime teaser loan. But this is even worse. First, teaser borrowers paid at least a smidge of interest (even 2% is more than zero), which placed a teeny constraint on their ability to take on debt. Second, housing was at least appearing to increase, so it wasn’t entirely nuts (merely sorta nuts) to look to the principal value of the house as security and reason to extend yourself financially.

The primary trend for real estate is still down in most areas. As we have indicated, Meredity Whitney, who was the most accurate bank analysts in the runup to the crisis primarily based on her ability to make decent forecasts of real estate prices, sees another 10% fall in prices by year end, primarily due to more foreclosures in prime real estate borrowers (which will also put pressure on lower priced housing in adjacent communities). And even in communities where it may arguably have bottomed, the lousy prospects for employment growth mean any appreciation over the next few years is likely to be modest at best.

So what happens? Desperate and unduly optimistic borrower (and undue optimism is a strong cognitive bias; most of us would probably not get out of bed each morning if we were realists) takes loan assuming somehow he can make it work: say, the job market picks up, so he can go from part time to full time, he can refi at a decent rate in two years, etc.

But how realistic is enough improvement in the job market to save people’s houses at their current mortgage level? The pattern for a lot of people who lose jobs is that their next job is at a lower rate of pay. And note a FURTHER dubious element: this bill targets “economically distressed areas.” Ahem, many of these areas are not coming back. Why are we encouraging people to stay there, when in many cases, better paying (or at least some) work is more likely to be in other communities? It would seem more productive to offer unemployed workers moving grants and maybe loans to help pay rent deposits in new locations (which in many states pay interest anyhow, but putting up a chunk of dough on top of moving costs is a big barrier when you are already out of work and in all likelihood sweating every expenditure).

So a LOT of conditions would have to fall into place for people against the wall to be salvaged by a two year loan. It’s unlikely to work for the vast majority. So the result is they STILL lose the house, and when they are unable to repay the HUD loan, they owe a big tax bill to the IRS.

3. This measure, as modest as it is, therefore looks like yet another backdoor transfer to banks, and a way to try to prop up housing prices (note the “stabilize housing markets” comment) and secondarily, funnel some cash to communities (note the loans are intended to be used for property tax payments too).

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  1. attempter

    These are the same guys who refuse to enact a jobs program, but they’ll toss out some crumbs to string along the indebted unemployed?

    Even if it really helps any unemployed housedebtor for a few weeks, this is quite an example of what I said in the “philanthropy” thread about giving someone a (rotting) fish instead of teaching him to fish.

    Yes, this is only another Bailout conveyance, with the unemployed sucker the “occasion” for it.

    1. Doug Terpstra

      You and Yves nailed it again: another backdoor bailout for banksters. The rest of us get another form of backdoor action.

      But it’s so strangely miniscule —‘chump change’ as Yves put it. Is it just a trial balloon, a down payment? It smacks of desperation.

      1. traderjoe

        And one more program that continues to tear at the social fabric (bailouts on back of ‘responsible’) – that leads to more frustration.

        Yea, seems like desperation. But it seems so incredibly stupid (because it’s so small to even bother pissing people off) that one has to wonder what their (PTB) real plan is? Are they trying to piss people off? What is their end game?

        The people that will be frustrated: (1) every taxpayer that doesn’t apply/qualify; (2) every applicant that doesn’t get chosen. (1) + (2) > 40,000 ppl by a WIDE margin.

    1. ozziindaus

      Non recourse. Bank receives guaranteed mortgage payments, tax payer gets the bill. 2 years on, bank forecloses and unemployed add 48 more months of misery

  2. Troubled Loner

    How come I never hear about any programs to help renters who are unemployed? Could it be because no banks are harmed when renters get evicted? And “the administration’s efforts to stabilize housing markets and communities” is just another way of saying “keeping overpriced homes overpriced”.

    1. NOTaREALmerican

      No…. It’s all about making houses affordable so you, and other American renters, will be able to afford them.

      Your government ALWAYS works for the best interests of ALL the American people.

      (queue: slow motion flag – hold the slow motion eagle – substitute populist music, keep the near-teary-eyed patriotic peasant looking skyward at the slow-motion flag).

      The 5 year plan. It’s not just for the Soviet Union anymore.

    2. traderjoe

      Actually there are a fair number of non-profit programs aimed at renters. I get your point, but there are some programs out there…

  3. brian

    they call it a loan
    but they never will collect
    the crime is they at best have a likely belief of this now/today and at worst know it
    disguished gift/bailout
    hey why not
    they did it for wall street
    give the little guy his too

  4. BondsOfSteel

    Actually dropping the money out of helicopters is probably a better plan. Less moral hazard and just as likly to work.

  5. RueTheDay

    Anyone notice the coincidental timing of this with the stock market drop? It seems US (and EU) policymakers primarily respond to fluctuations in equity indices these days rather than changes in real economic activity. Stock market down sharply for a day or two? We need a new rescue plan, stat! Stock market rallies for a few weeks? Woohoo, we’re out of the woods, time to get serious about austerity. Meanwhile, unemployment could hit 25% and so long as the Dow held up, it would be ignored.

  6. Omitted Kingdom

    People are going to move to “other communities”? Doubtful, because my thought is 5 applicants for every job is a uniform measure. Maybe they’ll never move, but they will be building some equity. What about if they do decide to sell? Nothing stops that and it becomes a local transaction. Naybe the house will get passed down to the kids and grandkids.

    The advantage is that the real estate transaction stays a transaction at the local level, which was the original intent of the Community Reinvestmet Act. Comumnity and local are where real estate was intended to stay, until Wall Street came up with their idiotic secondary derivatives market.

    1. Paul Repstock

      Sorry Kingdom… These loans are not targeting homes that will be “passed down”, or sold…It is circular money merely breifly in the hands of desperate people. Then it goes back to the banks..:(

      The same money, little as it is, would have been far more effective if lent to people further up the ladder as far as debt goes. There, it might have built some equity and a part of it would actualy have prevented forclosures instead of just postponing them.

  7. Francois T

    As long as Obama refuse to engage (as in “Engaging bandits! Fire missiles!”) corporate powers, and enlist true entrepreneurs, it’ll be a lost cause for the economy…and his Administration.

    The desperation is evident when “Bozo The Spokesman” Gibbs lash out at the “professional Left” when it is the relentless attacks of the “Professional Right” that have thwarted him since the beginning. That, and his own congenital cowardice too, BTW.

    1. Progressive Ed

      But the President hasn’t really been thwarted. As a Progressive just let me point out that inside the Finreg and Obamacare legislation are hundreds of news boards and regulatory authorities to make sure the people stay on the right track.

  8. anon48

    “…So the result is they STILL lose the house, and when they are unable to repay the HUD loan, they owe a big tax bill to the IRS. “

    Exactly. So it’s a complete waste of government reserves (and our money). Especially if the funds are extended to those whose mortgage is already underwater. Further those who can’t repay the loan will be incentivized to remain insolvent or even declare bankruptcy. That’s because debt forgiveness usually creates taxable income to the extent of the debts forgiven. However, cancellation of debt income can be excluded from taxable income if the taxpayer is personally insolvent at the time of the debt cancellation.

    Hence, other than if the home goes up in value, there’s no reason for the borrower to work his (or her) way out of their difficulties. From that perspective they’d just be throwing good money after bad.

    I assume there’s no chance that these loans will be extended only to those who have some equity in the home (say at least 20%).

    “…The initiatives will help “a broad group of struggling borrowers across the country and in doing so further contribute to the administration’s efforts to stabilize housing markets and communities…”

    I guess we should reframe the situation of the former treasurer of one of our local athletic associations. She didn’t steal in excess of $50,000 from the club’s checking account. Rather, she was further contributing her efforts to help stabilize the retail jewelry and travel industries.

    1. anonC

      Is it possible that Obama is just a dumb ass, just plain stupid, just as the rest of the elected “elite” has been for the last 20+ years (i.e Geithner, Summers, and Rubin)?

      We’ve been bedazzled by these ninnys. Intelligent people have made intelligent arguments against their positions to no effect and the Blankfein’s of the world have landed on top.

      They are not the best of the best,although they may be best of breed. We need a new best of breed to measure our heros against.

      Give me a society where E. Warren is a hero and I’ll give you a society that finds our way out of this mess.

      1. traderjoe

        Um, they’ve done a splendid job of robbing the middle class and creating vast wealth for themselves. All of the political class. Bought and paid for by the bankers, defense industrialists, mega-corporations, and financial complex.

        Made out like bandits. They don’t care about the middle class and their happiness. Sociopaths.

  9. Nick Jihad

    Is this intended to be a short-sale enabler?

    E.g., HUD would lend the amount that the homeowner
    would need to pay in a short sale – the amount that
    they are underwater?

    1. ozziindaus

      The point of a short sale is that the owner should walk away without recourse. That’s of course if you have good representation

  10. john bougearel

    “most of us would probably not get out of bed each morning if we were realists” funny stuff on optimistic cognitive biases. Still, I’d probably get out of bed even without the distortion, perhaps that is just me.

    To your point about helping those in ‘hard hit areas’ it sure hits the right chord for a liberal democrat to hit. But as you shred, little chance of finding a decent job in a hard hit area.

    Which leads you to conclude, and rightly so, is that this measure is another means to provide another backdoor transfer of payments to banks for the next two years.

    The Obama administration really couldn’t work much harder to be more odious than they already are to main street America.

    I am beginning to think we ought to rebrand our president an ‘asshole’ instead of president. It would hardly be a misrepresention of the product.

  11. Secretary Cleary

    The mythical figure who campaigned on the platform of “Change” has become Bush+1. As an owner of distressed mortgage assets, my phone blows up every time Obama rolls out a new “home-saving program” (backdoor bank bailout), with borrowers demanding “that new Obama Plan.” It’s a myth folks, just like the guy you voted for. This new plan is appalling, giving someone $50,000 so they can make payments to the bank.

  12. ScottA

    Yves, you’re always head and shoulders above most other finance writers.

    Informative, well-spoken – and occasionally you have me laughing out loud (“and undue optimism is a strong cognitive bias; most of us would probably not get out of bed each morning if we were realists”).

    Your blog continues to be my first read every morning. Thanks so much for all the work you put into this.

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