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).