Weak consumer sentiment and still-falling home prices are scuttling hope for a strong spring housing market, but what truly stands in the way of solid recovery is far more complicated.
It's the fuel that drives home sales—credit. The mortgage market is mired in policy and politics that could directly affect buyer decisions on Main Street.
State attorneys general met in the nation's capital in March and were presented with the beginnings of a settlement in the so-called "robo-signing" foreclosure paperwork scandal, which has brought foreclosure filings in several key states to a near halt.
While much of the "term sheet," as it was called, deals with the foreclosure process at the major servicers, including precise details as to how they need to modify mortgages before initiating foreclosures, there was nothing in the document about a penalty or fine that those same servicers are expecting.
"That means the real fight will be over the size of the monetary penalty and over the requirement to forgive principal," says MF Global's Jaret Seiberg. "In our view, those are high hurdles as we question if banks would agree to either."
The talk has surrounded a potential $20 billion fund that would be used to forgive mortgage principal, into which the banks would pay. The trouble is 23 percent, or 11 million borrowers, now owe more on their mortgages than their homes are worth, according to CoreLogic. Not all of them are in trouble on their monthly mortgage payments; the concern is that if principal reduction becomes available, they will go after it.
In an interview on CNBC, JP Morgan Chase's CEO of Retail Financial Services, Charles Scharf, said, "We are suspect of using it in a very broad way." When asked if he expected the bank would be forced to forgive principal on troubled loans, he responded, "Only time will tell."
Any settlement or agreement is likely to take much more time, which continues to put uncertainty into the market and keep lenders to a very conservative standard when it comes to new originations.
This controversy comes as several federal regulators try to reach consensus on risk retention rules for lenders, mandated by the Dodd-Frank financial overhaul. The centerpiece is what exactly will constitute a Qualified Residential Mortgage, QRM. Such mortgages would be exempt from risk retention rules requiring lenders to hold at least 5 percent of the loan's risk on their books before securitizing the loans and selling them off into the marketplace.
A few of the regulators have told CNBC that a 20 percent down payment is the consensus for part of the QRM standard, while others dispute that number. Some argue high mandatory down payments will further constrict the market, and in any case don't prevent mortgage defaults.
"Boosting down payments in 5 percent increments has only a negligible impact on default rates, but it significantly reduces the pool of borrowers that would be eligible for the QRM standard," concluded a study by the Community Mortgage Banking Project, which analyzed 33 million home loans originated between 2002 and 2008. Underwriting standards, they argue, are far more predictive of default.
Also hanging over the market is the potential demise ofFannie Mae and Freddie Mac. While their dismantling will arguably take many years, the Obama Administration has already set out a framework and committed to making Fannie and Freddie loans more expensive and more difficult to obtain, hoping to pull private investors back to the market.
The same goes for the Federal Housing Administration, FHA. Commissioner David Stevens has already said its market share is far too high, which is why fees and rates have and will continue to go up on what was supposed to be the only avenue for lower-income borrowers with weaker credit.
In addition, the new Republican House is going after the administration's mortgage bailout program, voting to abolish billions of dollars in funds to hard hit states and harder hit borrowers. The centerpiece is the Home Affordable Modification Program, HAMP, which promised to help 4-5 million borrowers but which has, in two years, put just over a half million into permanent modifications.
"Not only is this a failing program, it's a failing program that causes real financial pain to the very people it was set up to help," says Rep. Patrick McHenry (R-NC), chairman of the Oversight Subcommittee on TARP.
"These programs are continuing to help people, and we don't see that the critics are offering any alternatives," counters Acting Asst. Treasury Secretary for Financial Security.
While the programs will likely continue, the controversy surrounding them would seem to prohibit any additional help from the government. This as foreclosures continue to fill the pipeline, and banks try to figure out what to do with them.