Fixing Foreclosures: 'How Far Are We Going to Go?'
There’s general agreement that home foreclosures are a major problem and that the Obama administration is right in deciding to attack the problem.
“If they’re going to spend money at all, this is useful because it resolves both an economic and a political problem.” says the Cato Institute’s William Niskanen, reflecting something of a consensus view.
But the severity of the problem, the mechanics of tackling it and the amount of money needed are very much under debate.
The Obama administration last week said it would “commit substantial resources of $50-$100 billion to a sweeping effort to address the foreclosure crisis,” through a variety of initiatives, including the TARP program, whose funding thus far has gone entirely to propping up banks.
Depending on whom you ask, that’s either way too much money or far too little.
“I think it’s too much. What would you do with it?” says Christopher Mayer, a real estate expert and vice dean at Columbia University’s business school, who recently testified before the House Financial Services Committee’s hearing on using TARP funding for foreclosure relief.
“A $100 billion is not a lot, given what the federal government is on the hook for,” says Edward Pinto, who was chief credit officer at Fannie Mae and now runs a consultancy. “The meter is running and it is going to increase.”
Pinto estimates foreclosure losses could be as high as $800 billion over the next 4-5 years.
There are currently 55 million mortgages in circulation. About 35 million are the responsibility of Fannie Mae, Freddie Mac and the FHA. About 8 million have been bundled and turned into securitized debt. The rest are held in the portfolios of various private lenders, such as banks.
- Stocks For a Diversified Portfolio
- Hot Tips for Obama's First 100 Days
- Video: Preparing Your Portfolio
- Global Pros: Rate Cuts Have No Impact
- Video: Turmoil in Financials
Pinto is forecasting 8.8 million foreclosures in the next few years. That’s roughly consistent with the FDIC’s estimate of 4-5 million in the 2009-2010 period and what’s likely to be two and a quarter million in 2008.
If that sounds like the result of something more than a garden-variety recession, you are right.
“The problem is we're in a much, much weaker position in this real estate crisis because the traditional underpinnings of underwriting have all been compromised,” says Pinto.
He estimates that one out of two loans made in the late years of the housing boom (2005-2006) were fundamentally dubious and essentially destined for foreclosure, because of exceedingly high loan-to-value and/or debt-to-income levels.
At the same time, the deepening recession is predictably adding to the pool of foreclosures as more qualified and resourceful borrowers fail to keep up with payments.
One Problem, Many Ideas
Though foreclosure prevention has been high on the Washington for a year and a half, the success rate has been low.
“Mortgage loan modifications have been an area of intense interest and discussion for more than a year now,” FDIC COO John F. Bovenzi recently told Congress. “Meanwhile, despite the many programs introduced to address the problem, it continues to get worse."
The FDIC knows as much about home foreclosures as any government agency, so statements like that don’t bode well.
The Hope for Homeowners program launched in October with an $18 billion budget is widely recognized as a failure and is in the process of being redesigned.
In addition there is no shortage of new proposals, from government loan guarantees or outright purchases of mortgages to dramatic changes in bankruptcy laws to incorporate home foreclosure.
Rep. Maxine Waters (D. Calif) recently introduced legislation based on a plan championed by Sheila Bair, chairwoman of the FDIC, which was launched in late August at IndyMac, the failed California thrift the agency has been running in conservatorship.
The “Systematic Foreclosure Prevention and Mortgage Modification Act of 2009” would seek to modify 2.2 million mortgages, about half of the non-GSE loans expected to become a problem in 2009. Under the plan, the government would share up to 50-percent of the loss, if the loan redefaults.
Mixed Results, Murky Data
Under the IndyMac program, the bank has made some 47,000 streamlined remodification offers to qualified borrowers since September. About 9,000 have been complete and another 1,700 in progress. The average unpaid loan balance is $269,000. The average monthly reduction in payment is $428,000, according to IndyMac's Evan Wagner. The FDIC says remodification efforts have saved $423 million
That may all sound promising, but neither the company nor the government are releasing redefault data. "It's still too early in the game," says IndyMac spokesman Evan Wagner. "As the numbers become a bit more mature that is something we'll be more willing to talk about publicly."
“Out model is something we still stand behind,” says David Barr of the FDIC, which recently agreed to sell IndyMac banking operations to a limited partnership. Barr says preliminary data shows about 1 percent or less are not current, on a 30-past due basis.