Slow Motion Repeat of Housing Collapse Right Before Our Eyes?

Is the foreclosure storm almost over orrnas RealtyTrac suggests in its most recent Housing News Report, merelyrngathering strength to come roaring back? rnOctavio Nuiry, Managing Editor of the Report writes that while foreclosurernactivity continues to wane there is a “tetrad” of housing landmines that couldrnthreaten the housing recovery and trigger a surge in defaults, repossessions,rnand short sales.</p

The tetrad consists of defaults in loanrnmodifications done under the Home Affordable Modification Program (HAMP), HomernEquity Line (HELOC) resets, and 8.1 remaining underwater borrowers and non-performingrnloans.  The article Housing Landmines:  Are MortgagernFlares Up (sic) Coming Soon? States, “The foreclosure crisis hasn’trnreceded, it was intentionally delayed by government manipulation.  The can was kicked down the road.  And next year, foreclosure activity couldrnspike again.”</p

The article reprises information previously reported about the looming HELOC resetsrnand the remaining pool of delinquencies and underwater mortgages, but itsrnindictment of HAMP is somewhat stunning.</p

Nuiry recounts the history of HAMP, fromrnthe time it along with its companion the Home Affordable Refinance Programrn(HARP) were announced by President Obama in February 2009.  At that time one in five homeowners owed morernon their mortgage than their home was worth, completed foreclosures werernrunning over 300,000 per month and home prices had fallen by nearly a thirdrnfrom their peak.  The two new programsrnwere set up to pay lenders an incentive fee for each modified or refinancedrnloan and the President forecast the two would assist between 7 and 9 millionrnfamilies.</p

Ultimately only 1.4 million homeownersrngot a modification (by July 2014) and 350,000 have defaulted and lost theirrnhomes.  While the article initially putsrnthe blame on “government manipulation” it actually appears to have plenty tornspread around.   </p

The administration, or at least TreasuryrnSecretary Timothy Geithner, it says didn’t intend it should really work.  Neil Barofsky, former Special Inspector Generalrnof the Troubled Asset Relief Program (SIGTARP) is quoted as saying Geithnerrntold him that HAMP was not designed to assist distressed borrowers but to helprnbanks ride out the crisis.  “We estimaternthat they (the banks) can handle ten million foreclosures over time,” Geithnerrnwas alleged to have said. “This program will help foam the runway for them.”</p

Former Federal Deposit Insurance ProgramrnDirector Sheila Bair said the program was designed to look good in a pressrnrelease, not fix the housing market.  Shernbelieved the program was too rigid in its qualification requirements and thatrnthe banks would scuttle it.  In her book Bull by the Horns Bair said “To requirernevery borrower to essentially prove that he or she could qualify for a new loanrnwas stupid – the loan had already been made.”</p

Attorney Jennifer Taub, whose book “OtherrnPeople’s Money” is reviewed elsewhere in the magazine, believes the banks arernto blame, saying that HAMP didn’t work because the banks didn’t want itrnto.  They dual-tracked homeowners,rnstringing them along with the promise of modifications as foreclosures werernprocessed.  “Several Bank of Americarnemployees claimed that they had frequently lied to homeowners and were paid bonusesrnif they sent them into foreclosure.”</p

Then there was money; at the start therernwas $75 billion earmarked for HAMP modifications, about 11 percent of that reservesrnfor the banks.   In 2010 that was cut torn$30 billion and in the end only $4 billion was spent.  Still the HAMP program as well as HARP werernrecently extended through the end of next year.</p

And now, Nuiry says, the chickens arerncoming home to roost.  For thosernborrowers who actually got a HAMP modifications (one in six of those he saysrnwho applied), rate resets are on the horizon.   Ninety percent will see increases in theirrnmortgage payments between now and 2021, 30,000 in the next year.  The reset rates will range from 4 percent torn5.4 percent and will be concentrated in four states, California, Florida,rnIllinois, and New York. </p

According to a report from SIGTARP, “Thernlonger a homeowner remains in HAMP, the more likely he or she is to redefaultrnout of the program.  Redefaults of thernoldest HAMP modifications are at a 46 percent redefault rate, a rate thatrncontinues to increase as the modifications age.”</p

Nuiry goes on to quantify the dangerrnposed by the HELOC resets.  As these loansrnreach the end of their open or draw down periods they change from interest onlyrnto fully amortizing loans, substantially increasing the monthly payment. Anrnaverage of $53 billion of these loans will reset each year between 2014 andrn2017.  TransUnion estimates that nearlyrnhalf of HELOCs have balances in excess of $100,000 and that some $79 billion ofrnthe loans will be at “elevated risk” of default.  These loans were not widely securitized thernway first mortgage liens were and many remain on the books of the nation’srnlargest banks.</p

The RealtyTrac article concludes withrnthe statement “Indeed, the collapse of the U.S. residential real estate marketrnis happening again right before our eyes in slow motion.”  It adds that the majority of the houses soldrnin the U.S. last year were bought by institutional investors and this spike inrnbuying for cash caused housing prices to rise over the last two years. 

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