The housing recovery is in an interesting stage. Even as more reports affirm a positive direction for the real estate recovery cycle, the push for additional government support is gaining momentum. Granted, intentions are noble, however, additional activity to assist the cycle could, in reality, bring headwinds to slow its progress.
What we’ve seen so far in 2012 is a dramatic reduction in mortgage delinquencies and foreclosures compared to 2011, due in part to a host of government programs and legislation already implemented throughout the mortgage crisis. Government influence began with the Obama Administration’s “Home Affordable” program suite of cures providing short sale incentives, loan modification help, and refinancing relief for homeowners in negative equity -- known as HAFA, HAMP, and HARP, respectively, and culminated with a landmark $25 billion settlement between individual states and big lenders providing relief on the state level.
Additionally, states have enacted their own strategies to slow the progression of distressed homeowners into the foreclosure pipeline. California being a case in point with the recent passage of its “Homeowners’ Bill of Rights” which affords homeowners increased protection from foreclosure above and beyond actions taken on a national scale. These steps have not only prevented more borrowers from reaching the foreclosure stage, they’ve also served to shrink the flow of distressed homes into the “shadow inventory” of residential housing, resulting in less distressed properties depressing overall home values. These are great developments. Not only are fewer people losing their homes, existing homeowners are seeing the value in their homes begin to rise and buyers are returning to a market now struggling to keep up with demand. Not all markets have seen this phenomenon but it is clearly becoming more frequent in most major markets.
Bottom line: existing programs to help borrowers, combined with small gains in the overall economy, are proving sufficient to support a healthy recovery. Additional intervention at this point could prove costly. Case in point: more widespread application of principal reductions at the GSE level striking a resonant chord with consumers, politicians, and the media, comes at a taxpayer cost and could drive private investors out of the market. Recent analysis from the FHFA, the conservator for Fannie Mae and Freddie Mac estimates principal reductions would prevent $1.7 billion in defaults, but cost taxpayers $2.1 billion in implementation and incentive payouts.
At the local level, recent Eminent Domain proposals allow municipalities to purchase loans at “fair market value” and pass on the savings in the terms of principal reductions. Championed by the newly- bankrupt California city of San Bernardino as a way to protect its distressed homeowner base and stop the hemorrhaging of tax revenue, if implemented; these plans could ultimately incur significant losses for private investors in securities collateralized by any of these mortgages. Moreover, principal reductions through Eminent Domain or at the GSE level provide little backstop for losses on homeowners who simply cannot make their mortgage payments.
Future prescriptive actions by the government could only serve to continue taxpayer participation in the recovery, prolong the recovery, or both. Where the housing sector can benefit, however, is by lenders playing a larger role. Borrowers in 2012 understand the responsibilities (and consequences) of a mortgage payment better than their predecessors of the previous housing cycle, and as such represent a better credit risk. It’s time for lenders to relax underwriting guidelines and qualify more borrowers for loans. In addition, while lenders have made significant strides in working with delinquent borrowers, they can do more to streamline the short sale process to dispose of properties before they come up for auction or end up contributing to an REO inventory.
Government has proven itself a strong ally in breathing life into the housing cycle. It’s now time for the cycle to run its natural course. The fundamentals are in place for it to succeed.
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