Plan as Announced Will Help Some, But Won't Save the Housing Market

The final guidelines for the new Homeowner Affordability and Stability Plan won't be out until early March but the consensus of analysts is pretty consistent.  The best coverage I've seen is from Mike Larson at Money and Markets .  This plan will help some borrowers who fit within narrow guidelines and few others. As I have said many times, without the active participation by lenders, servicers and investors in writing down the principal balances on loans in the bubble areas, not much will change and the housing market will continue in a downward spiral, minus the few for whom the new plan makes a difference.

Other news links on the Obama plan:

Obamas Housing Plan, Who will Benefit?
http://economix.blogs.nytimes.com/2009/02/18/obamas-housing-plan-who-will-benefit/?partner=rss&emc=rss

$275 Billion Plan
http://www.nytimes.com/2009/02/19/business/19housing.html?_r=1&8au&emc=au

Public reaction has been fear that "Good Taxpayers" who are current on their mortgage, even though they may be upside down, might end up subsidizing neighbors (perhaps some with bigger houses and looser spending habits) to help them keep their homes. This could be true for some borrowers, but the gaps in "Loan to Value" (LTV) and the drop in prices in the worst bubble markets in Florida, California, Arizona and Nevada preclude refinancing of these loans under the announced guidelines.

We will all be painted by the same brush if nothing meaningful is done to make lenders participate in taking current losses on existing mortgages. Amazingly, I have seen so many commentators on financial news networks say that those who are underwater through no fault of their own, should simply give in to the inevitable and take the foreclosure of their home in stride. Obviously these same commentators are at no risk in their own situation. Many of those "Good Taxpayers"  forced into foreclosure will never be able to buy a home again and face the prospect of being renters for the rest of their lives on top of taking it in the shorts on their pension plans and personal stock market investments.

The strategy of reducing principal balances is not supported by mandate in the proposed legislation except in very mild terms and by small amounts of federal subsidy that are meaningless in the bubble areas except for a few odd borrowers on the margins. The more than $3 Trillion plus destruction of real estate equity in recent months will create a new underclass who expected some security in retirement from home equity, but who now face the prospect of working till they drop without the possibility of building equity through home ownership, since they will be renters rather than owners of real estate.

The reaction from the financial industry  just about says it all. Major banking figures have said that their banks will pursue modifications that kick the can down the road by extending terms (which may actually increase their profits over time) or by temporary reductions in interest rates. Pretty much everyone in the industry has said that investors and second home owners are on their own and principal reductions are not an option for owner occupants or investors. In the current environment of voluntary loan modifications, 2% or less of all modifications include principal reductions even though studies have shown that loan modifications with principal reductions are far less likely to re-default and up to 50% of the "kick the can" modifications re-default quickly.

As Mike Larson points out, investors and second home owners represent up to 40% of the homes purchased (most using Adjustable Rate Mortgages) in 2005, mostly in the bubble areas, but nationwide as well. This plan does little for this segment of buyers and the best hope for this group (for those that have the means) is to pursue a Loan Modification by a Law Firm specializing in real estate and with proven expertise in the Forensic Loan Audit Process.  This type of audit can range in cost from a few hundred to more than $2500.00 per property, just for the audit. If the law firm is retained to facilitate the loan modification process, an "earned when paid" retainer from $2500.00 to $7500.00 is charged per property/loan.  Properties with more than one loan mean more legal fees and higher retainers. Attorneys are under no obligation to return any part of their retainer if the modification effort fails or has less than the desired results.

The outcome for many investors, whether they were speculators or not, is that most will let investment properties and second homes go to foreclosure or offer the properties back to the bank through a "Deed in Lieu" of foreclosure. In either scenario, the number of properties going back to the banks will increase dramatically, since the options for their owners are so limited.

In turn the sales of the new foreclosure properties at distressed prices is likely to further depress values in the affected markets and the spiral will continue until affordability is there for average borrowers or when investors with cash are excited by the risk adjusted returns available from deeply discounted properties purchased for rental income.  A great deal of cash is sitting on the sidelines waiting for prices to crash to a level that will make the decision to invest a no-brainer. this is especially true of Hedge funds looking to buy distressed asset pools from lenders who must capitulate on pricing.

Unfortunately, this strategy leaves out the average investor, who cannot pay cash or afford to buy and hold. The benefit in this crash will accrue mostly to those who were already wealthy to begin with.