Nov012013

Loanowner bailout, HARP 2.0, bottomed the housing market

Many politicians and advocacy groups lobbied for principal reduction for underwater borrowers. This was the preferred solution among loanowners because it was giving them free money and removing any consequences for their ill-timed purchase or refinance. Principal reduction was not favored by lenders or taxpayer watchdog groups because either the lender or the government was going to pay the price for trillions of dollars in principal reductions. The compromise solution was loan modification.

The early efforts at loan modifications largely failed because far too many people were given debts they couldn’t manage during the housing bubble, and they didn’t qualify for new loans everyone knew were going to go bad. Over the course of three years from October 2008 when the crisis hit until October 2011 when HARP 2.0 was unveiled, loan modification terms were repeatedly loosened to qualify more and more borrowers. Finally, with HARP 2.0, nearly all loan qualification standards were removed.

HARP 2.0: Changes for the better.

New, simpler HARP guidelines are designed to approve more loans. And changes to the program itself mean that even if you were turned down for HARP before, you may now meet the requirements.

Important changes to the HARP program include:

  • No underwater limits
    Borrowers will now be able to refinance regardless of how far their homes have fallen in value. Previous loan-to-value limits were set at 125 percent.
  • No appraisals or underwriting
    Most homeowners will not have to get an appraisal or have their loan underwritten, making their refinance process smoother and faster.
  • Modified fees
    Certain risk-based fees for borrowers who refinance into shorter-term loans have been reduced.
  • Less paperwork
    Lenders now need less paperwork for income verification, and have the option of qualifying a borrower by documenting that the borrower has at least 12 months of mortgage payments in reserve.
  • Extended deadline
    The end date to get a HARP refinance has been extended to December 31, 2015.

Basically, anyone who asks was given a loan modification. Of course, this ignores the very reason the early programs had qualification standards — people who are unqualified for loans generally default. As a result, loan modification redefault rates are very, very high, upwards of 50% on many vintages. However, as I’ve pointed out many times, it really doesn’t matter if these people redefault. Nobody expects them to sustain home ownership. What lenders really wanted was to remove these bad loans from the delinquency roles, get a few more pennies out of desperate borrowers, and delay the sale until prices were higher and demand was strong enough to absorb the additional sales. That policy worked.

With the introduction of HARP 2.0, mortgage delinquencies began to drop more quickly.

The decline in foreclosure starts corresponded to a huge increase in high loan-to-value loans originated by the GSEs as they started financing borrowers who were deeply underwater.

This is the catalyst that removed the supply from the market and caused house prices to bottom.

Commercial banks go along for the ride

The weakness of HARP, at least in the minds of bankers who want to offload their toxic assets, is that HARP only covers existing GSE loans. If the loan is held in a commercial bank or private MBS pool, it’s not eligible for HARP. Commercial banks granted many private loan modifications, but as we saw yesterday in 2014 will see the “Rise of the Short Sale”, these loan modifications carry onerous terms, and they are nearly certain to blow up again in the future. As a consequence, the delinquency rates at the major commercial banks remains very high, and the cure rates are very low.

If you project out the current rate of cure on delinquent mortgages at the major banks, they won’t see normal delinquency rates of less than 3% until 2040. Obviously, something must change.

The major commercial banks are betting that without the supply pressure that prices will rise enough for them to recover more on their bad loans when they finally take action on them. As yesterday’s post speculates, many of these “cures” will likely be short sales. However, short sales require borrower participation, and since many will chose to squat if offered the chance, the banks will finally have to force these people out with a foreclosure. I expect we will see a “surprising” increase in foreclosure processing long after most come to believe (with help from the MSM) that the foreclosure crisis is past. I suppose it’s also possible that lenders will be able to kick the can until 2040, but that doesn’t seem plausible. I rather doubt loanowners will remain locked up in their debtor’s prisons that long.

The final option is to allow permanent squatting. With the average foreclosure time up to 895 days, lenders are certainly not adverse to long-term squatting as a solution to prevent them from recognizing losses.

It’s too early to tell for certain, but the average days of delinquency for long-term squatters fell in August for the first time in five years. This may mark the peak of squatting as lenders start processing legacy loans. However, with 4,464,763 delinquent mortgages, lenders still have a lot of work to do.

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1254 West CLAREDGE Dr Anaheim, CA 92801

$509,900 …….. Asking Price
$254,000 ………. Purchase Price
10/10/2001 ………. Purchase Date

$255,900 ………. Gross Gain (Loss)
($40,792) ………… Commissions and Costs at 8%
============================================
$215,108 ………. Net Gain (Loss)
============================================
100.7% ………. Gross Percent Change
84.7% ………. Net Percent Change
5.7% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$509,900 …….. Asking Price
$17,847 ………… 3.5% Down FHA Financing
4.28% …………. Mortgage Interest Rate
30 ……………… Number of Years
$492,054 …….. Mortgage
$136,682 ………. Income Requirement

$2,429 ………… Monthly Mortgage Payment
$442 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$106 ………… Homeowners Insurance at 0.25%
$554 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,531 ………. Monthly Cash Outlays

($630) ………. Tax Savings
($674) ………. Principal Amortization
$28 ………….. Opportunity Cost of Down Payment
$147 ………….. Maintenance and Replacement Reserves
============================================
$2,402 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$6,599 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,599 ………… Closing Costs at 1% + $1,500
$4,921 ………… Interest Points at 1%
$17,847 ………… Down Payment
============================================
$35,965 ………. Total Cash Costs
$36,800 ………. Emergency Cash Reserves
============================================
$72,765 ………. Total Savings Needed
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