Loan Modifications Help the Housing Market
The Wall Street Journal
By James R. Hagerty
January 19, 2010
President Barack Obama's plan to ease mortgage terms for millions of distressed homeowners, announced nearly a year ago, now is widely panned for having fallen short of its ambitious goals.
But some analysts say the program is a success in one sense: By slowing the flow of foreclosed homes to the market, it has helped prop up housing prices, at least for now. The administration's Home Affordable Modification Program, or HAMP, and other state and federal efforts to avert foreclosures have helped "buy time" for the housing market, preventing steeper home-price declines, said Ajay Rajadhyaksha, a managing director at Barclays Capital in New York.
The official goal of HAMP is to reduce monthly loan payments for distressed borrowers so they can afford to stay in their homes. But housing analysts at UBS Securities in New York, in a report last week, described HAMP as "a vehicle to delay the timing of new foreclosures hitting the market."
Most analysts assume that a large share of the people who get modifications will default again within a year or two. Thus, some critics say the government and banks are merely "kicking the can down the road" on foreclosures that will hit the market eventually. The unresolved question is whether the housing market will be better able to absorb foreclosed homes in a year or two. That depends on whether the economy and job growth recover.
Treasury officials argue that the loan-mod program is working out well in terms of keeping many people in their homes, but they also acknowledge the broader effect on home prices: "I think it has had quite a strong stabilizing influence" on the housing market, Treasury Assistant Secretary Michael Barr said in a briefing Friday.
In late 2008, banks dumped many of their foreclosed homes on the market, pushing prices down sharply in some areas. Around that time, though, banks began acquiring fewer homes through foreclosure. That was partly because of various moratoriums on foreclosures at the state and federal level, followed by HAMP. Because of HAMP, banks feel heavy political pressure to carefully screen borrowers to see which ones might qualify for loan modifications before proceeding with foreclosures. That has extended the time it takes to decide whether to force through a foreclosure, creating a huge backlog of unresolved cases.
As a result, there are fewer foreclosed homes on the market. The number of such homes available for sale dropped to 637,000 in November 2009 from 845,000 a year earlier, Barclays Capital estimated. Barclays expects the number to start rising again as people who don't qualify for a loan modification or don't want one lose their homes, and peak at 747,000 in April before declining gradually.
As recently as September, however, Barclays expected a peak of nearly 1.2 million foreclosed homes for sale in mid-2010. "Our projected peak keeps getting lower, the longer banks delay foreclosure sales," spreading the pain over a longer period, says Glenn Boyd, a senior researcher at Barclays.
That has implications for pricing. The S&P/Case-Shiller 20-city home price index is down 29% from its peak in 2006 but has leveled off in recent months as fewer foreclosures have hit the market.
As of Sept. 30, about 7.5 million households were behind on their mortgages or in the foreclosure process, according to the Mortgage Bankers Association, a trade group. It isn't clear how many of those homeowners can ultimately be rescued. HAMP so far has resulted in about 900,000 loan modifications, most of which are still in a trial period.
Louis Amaya, chief operating officer of National Asset Direct Inc., a New York-based asset manager whose affiliates purchase and service troubled mortgage loans, said the administration has used HAMP to shame lenders into offering lots of loan modifications but that a large share of those aren't sustainable. "The reality is that most people aren't going to qualify for a loan mod" that makes economic sense for both the borrower and lender, Mr. Amaya said. Those who can't afford their homes should be allowed to exit with dignity, such as through a short sale, in which the house is sold for less than the loan balance, he said.
Instead, HAMP is "dragging out" the foreclosure process, Mr. Amaya said, and "we need to let the market correct itself." Until the huge backlog of loans headed for foreclosure is cleared, he said, the housing market can't recover.
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