Government housing initiatives fall flat
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Tess Vigeland: More than a quarter of U.S. homeowners owe more than their house is worth. A.K.A. — they’re underwater. Most experts say that if this persists, foreclosures will keep on coming.
But what about those sunny sounding government plans to help stave off foreclosures? You know, Hope Now, Project Lifeline, Making Homes Affordable. Are they doing anything? Dr. Chris Thornberg is one of the co-founders of Beacon Economics and an expert on real estate. Chris, welcome to the show.
CHRIS THORNBERG: They all roughly do the same thing. They’re working with banks, borrowers, and the federal government in order to promote the modification of mortgages for people who are having trouble making their payments. And unfortunately they have all run into the same set of issues, which is really limited the overall success of these programs.
VIGELAND: Can you tell us what some of those issues are that all three of these programs are facing?
THORNBERG: All of these programs are working to try and keep people in their homes by changing the monthly payment. What they’re not doing is changing the actual principle balance that is on the home. In many ways this is the functional flaw of the program.
The basic idea here seems to be that people want to stay in their house no matter what. But people understand that even if their monthly payment goes down, if you’re $100 or $200,000 underwater, that hasn’t changed. And as a result of that, a lot of people even if their mortgage is modified end up basically foreclosed on within the next six to nine months anyway.
What you’re seeing out there is an enormous recidivism rate. Something on the order of 60 to 65 percent. So in many ways, lenders are looking at these programs, and they’re saying quite rightly, this seems to me to be a program for people who more or less allows them to simply stay in their house for free for another six months. Rather than actually taking somebody who is not making payments and turning them into a true long run paying person.
VIGELAND: Is any part of this problem the fact that it’s voluntary on the part of the banks?
THORNBERG: Oh, absolutely that’s part of the problem. There’s no doubt about it.
VIGELAND: Why would it be better for a bank to allow homeowners to go into foreclosure versus trying to help them stay in the home? What’s in it for the bank if a house goes into foreclosure?
THORNBERG: You know that’s a great question. What you’re asking me is why aren’t they willing to write down the principle. When all is said and done the loss ratios on the actual mortgage are enormous. We’re looking at 60 to 70 percent that could be avoided if they simply sat down with the borrower and said look, we’re willing to, say, slice off 25 percent off your principle if you’re willing to catch up on your payments and continue making those payments into the future.
Yet, here is what the banks are saying. About 25 percent of all mortgages that enter into serious delinquency actually end up catching up. And what they’re worried about, of course, is that some of those folks, they might cut the principle for no good reason. Another big issue: a lot of these folks who may be walking away from their mortgage, could make their payments, but these are folks who are making the rational choice. They’re thinking, gee, I have a $400,000 mortgage on a $300,000 house. I could make my mortgage payment because I have a good job with a good income, but I’m not going to bother.
VIGELAND: Let me bring this finally back around to these three government programs that are out there trying to rescue people who are either in or headed to foreclosure. If these aren’t quite the right model, what is a solution?
THORNBERG: I don’t think there is much of a solution that will realistically keep people in homes. A lot of people made bad financial decisions. I have been a fan of what I call the Mulligan rule. That would be basically a program under which Frannie and Freddie, which is, by the way, government owned, would be told for the next two years when someone comes to you and wants to borrow money to buy a house, you’re going to look at all the things that you normally look at with one exception. If this person should have a foreclosure on their credit report for the last two years, you ignore it. Now what this does is it allows people who just got foreclosed on sorta of a new chance, a fresh chance, to buy a house that oh, by the way, this time is affordable. If you did that then this would cure most of the situation. Yes, there would still be lots of lots of foreclosures. But if these people could land on their feet so effectively, it would allow the housing market to repair itself much faster. You’d have these neighborhoods with all these foreclosed homes suddenly being renewed and being reinvigorated because there would be new owners in the neighborhood. And it would get us through this mess so much faster.
VIGELAND: So you could just take your ball right out of the sandtrap, and put it right on the green.
THORNBERG: Absolutely.
VIGELAND: Well, Chris, always good to have you on the show. Thanks so much for coming in.
THORNBERG: Thank you, Tess.
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