As Predicted Here, "Home Affordable" Is Not Making a Dent in Foreclosures

For some time now, I have been unable to make a coherent entry into this blog simply because the level of my dismay, disbelief and despair over the unbelievable transfer of wealth from Taxpayers to Financial Institutions through the various Federal Bailout  schemes and the lack of massive public outrage over  the socialization of massive losses by private businesses through the FDIC.

Since the FDIC has burned through existing reserves, we will continue to see more and more "Public Private Partnerships" where the private partners (including many key financial contributors to both political parties and powerful lobbies) get distressed assets at unbeatable discounts with losses guaranteed by future taxpayers. Isn't this the privatization of profits and socialization of losses? A great example of this is the recent purchase of assets from the former Corus Bank by private investors, with public guarantees of losses.

I've said many times in this blog that no Loan Modification Program that does not mandate reductions in the Principal Balance of outstanding mortgages will solve the problem of increasing foreclosures, particularly in the "Bubble" states of California, Arizona, Nevada and Florida and anywhere else where the growth in housing values left median incomes far behind.  Add to the mix the increasing unemployment and underemployment in those same states and the outlook for a National SFR pricing recovery any time soon is very bleak.

More Unintended Consequences
The unintended consequences of the foreclosure moratoriums and the slow adoption and minimal implementation of the HAMP style modifications will only mean more and more foreclosures down the road.  By some estimates there is a "Shadow Inventory" of bank owned properties as many as 7 Million units as a result of defective Federal policies and their hit or miss implementation. Apparently banks are able to hold deflated assets in  off balance sheet holding vehicles and by using other accounting tricks.  Clearly the bankers do not feel the need to release any of this inventory to the marketplace.  If banks were mandated to release their shadow inventory to comply with capital requirements, market values would take another huge hit. 

I truly believe that if there is no huge public outcry with demonstrations and even some mayhem (similar to the emotional and visible response to National Health Care initiatives) nothing will change and the SFR market will continue to decline or fail to stabilize.  Truthfully, I am speechless at the lack of visible public response to travesties such as HAMP.

There have been numerous recent articles about the effectiveness and volume and sources of HAMP modifications and who is actually doing them.  Today in the Huffington Post, writer Shahien Nasiripour talks about one Loan Servicer that is doing almost half of the "Permanent" HAMP modifications. He also points out the pitiful HAMP results produced by the biggest beneficiaries of TARP funds.

The servicer mentioned in the Huffington Post article stands to earn more than $600 Million Dollars in taxpayer funded fees for doing the "Permanent" modifications they have completed as long as the homeowners stay current on the HAMP terms for five years.  The other aspect of these modifications is that the ultimate results rely solely on a strong market recovery that would incent the homeowners involved to keep paying the loan.  Since a typical HAMP modification does not include any reduction of mortgage principal to reflect current market value, the majority of these modifications will redefault if prices continue to fall. Many of these so called modifications represent a house payment in excess of 50% of Gross income which is not sustainable for most borrowers.

Under HAMP, desperate homeowners are willing to accept a 5 year reduction in rates to a low minimum of 2% (depending on their financial condition) and many have accepted an extension of their loan period to 35 or even 40 years at the full current loan balance. On top of the fees the servicers will collect if the market is relatively stable or goes up again, the lender is the beneficiary of a loan that has recast, with the borrower starting a new amortization schedule. This means that for better than 17 years on a 30 year loan, much if not most of their monthly payment will be interest to the lender and an extended loan period of 35 or 40 years means even more interest to the lender over the term of the loan. While a few of these homeowners may eventual pay off their properties, the opportunity cost in other financial areas of their lives, including pension savings, and their ability to contribute financially to the education of their children or support of their parents will surely be reduced. 

Banks Servicers and Investors Winning Big
The current status quo for bankers is not bad considering the more realistic alternative for the Feds would be to mandate that banks recognize current values in REO portfolios, and take the necessary hits to capital and earnings and make meaningful principal reductions part of any Loan Modification program.  Fortunately for the FIRE sector, their apparent total control of the new administration has given them every opportunity to ignore reality and kick the can down the road.  In the process they have lined their collective pockets with taxpayer funds and even created new sources of revenue, like HAMP. If the market should recover in the near term the bankers are the clear winners and taxpayers and homeowners will continue to fund the winning side.