Throwing Darts Blindfolded
In an ideal world you would expect our government agencies, national lenders, and policy writers to be in constant communication throughout their efforts to implement an effective plan for housing. Alas, what we have instead is a confluence of new policy, old policy, and fluctuating lending standards that make market clarity a pipe dream, at least in the near term.
Here’s what coming down the pipeline.
1. End of the Home Buyer Tax Credit – Contract by April 30, 2010
2. End of the FED MBS purchasing program – End of March, 2010
3. Increase in loan insurance fees for FHA borrowers – April 5th, 2010
4. Initiation of the Home Affordable Forclosure Alternatives Program – April 5th, 2010
There’s quite a bit to break down, so let’s get into the implications of each of these events:
1. The Home buyer tax credits must come to an end at some point. Much like the FED MBS purchase program, the government can only artificially support a market for so long before the ill effects begin to outweigh the good. No issue with the timing as it will be toward the end of the spring market. See my March 17, 2010 post for details about the Home buyer tax credits.
2. There is no hard and fast answer as to where interest rates will head when the FED ceases its purchases of Mortgage Backed Securities. I would expect a gradual increase over time. Any drastic move higher will likely be met with more government intervention to keep the housing market from coming to a complete stall. Regardless, moving into the last month of the tax credit, buyers/the goal of the program are both better served by mortgage rate stability. See my March 12, 2010 post for more on the FED and MBS’s.
3. Here is where it gets extremely backwards. Instead of waiting until after the expiration of the credit to raise insurance premiums for FHA borrowers, it is happening a month before. These are the most affordable government backed loans requiring only 3.5% down. In essence, borrowers with less total money down who would likely be in the market for homes at lower price points where there is abundant inventory that needs to be soaked up. These borrowers will have the option of rolling that extra cost into their loan if they do not have the extra cash up front. That option will obviously begin to rob them of what little equity they were able to build into the purchase with a 3.5% down payment. There are good reasons for making this change, but the timing is what strikes me. For more on this topic see the March 17, 2010 post over at: http://www.yourchicagomortgageguy.com/
4. The Home Affordable Foreclosure Alternatives Program (HAFA) is an extenstion of the Home Affordable Modification Program or (HAMP). HAMP loan modifications met with little success when first initiated, mainly because giving a borrower a modification so they have lower monthly payments on a home that is worth less than the loan amount is like giving a lost driver a new and longer route to the same dead end. The HAFA program is supposed to provide an alternative option to these borrowers in the form of a short sale. The list of qualifications for the HAFA program all but ensure its failure unless greatly altered along the way. Here are a few of the glaring defects:
1. Applicants to HAFA must make their partial mortage payments at 31% of their monthly income.
2. Applicants must pay off all secondary liens so that they can provide a new buyer with clean title.
3. Applicants will face tax and credit consequences
4. If the short sale is not successful the owner of the property is expected to hand ownership of the property back to the bank, i.e. a deed in lieu.
Just based on those couple items lets break this down. How many home owners who are en route to foreclosure can make the monthly partial payments, pay off any and all secondary liens, HELOC’s, Private mortgage insurance, and the like. My guess is a shockingly small percentage of the homeowners this initiative is directed at. If any of you economics types are reading this and want to run the numbers I would love to hear your thoughts. Assuming the sale does not go through, the bank is supposed to take back the deed. Not to get overly technical here, but if you can’t pay off your home equity line of credit, the bank has no desire to accept a deed for a property where they are liable for your other debts.
Talk about confounding variables convoluting the search for an accurate depiction of supply and demand. i.e., this makes no sense.
I’d be happy to hear some comments or questions on this matter. I have plenty of my own.
Best,
JLC
