From Josh Steiner's update on housing (3/26):
In the last few days there have been at least three notable positive developments, on the margin, related to housing, and arguably one big negative.
First, California passed a plan yesterday to allow a $10,000 homebuyer tax credit, which would be effective May 1, 2010 and run through December 31, 2010. The timing of the plan is no coincidence - it's timed to begin the day after the planned expiration of the Federal Government's $8,000 homebuyer tax credit. The legislation calls for $100 million to be allocated for first time homebuyers, defined as anyone who hasn't owned a home in the last three years. There is a further $100 million allocated for any buyer of a new, unoccupied home. The initiative, at a total cost of $200mn, will be tacked onto the state's deficit of $20bn. There was only one state legislator who voted against the bill on the grounds that California couldn't afford it. We wouldn't argue there. Gov. Schwarzenegger signed it into law yesterday. A similar program to this one was in place last year, but was exhausted in just four months (March-June). A further positive may be in the cards as well. A separate bill that would have exempted state taxation on forgiven mortgage principal was supported in principle by Gov. Schwarzenegger, but was vetoed because of unrelated riders tacked onto the bill. It is expected that this issue will be taken back up in coming months. For reference, California passed such a law in 2008 that had a two-year shelf life, so this bill is simply aimed at extending a law already on the books, but set to expire.
Second, Bank of America rolled out a plan two days ago, on a very limited basis to facilitate a measure of principal forgiveness. The program intends to keep underwater borrowers in their homes to stem the tide and cost of foreclosure in coming years. Aimed squarely at high-risk Countrywide borrowers with subprime and Option ARM loans who are 60 days delinquent or are current but are likely to become delinquent, and who are significantly underwater (i.e. 20% or greater), the program would enable up to 30% principal forgiveness over five years. For instance, on a $400k loan where the home is now worth $300k, Bank of America would move $100k into a separate, interest-free account, and would forgive $20k/year for up to 5 years provided the borrower remained current. The catch is that Bank of America is only targeting 45k borrowers for principal forgiveness with this program. The program is expected to ultimately forgive $3bn in principal. For reference, the most recent First American Corelogic data shows $801bn in total negative equity represented by all underwater borrowers, so Bank of America's program would address roughly 37 bps of the problem. A step in the right direction, but clearly not enough to solve the challenge.
Third, the White House is set to unveil today a renewed effort to combat foreclosure. Using existing funds under the $75bn HAMP program, the Administration has rolled out 5 key, new initiatives that it thinks will, on the margin, help a significant number of additional homeowners keep their homes. The new programs will be implemented over the next six months. The final details of the program will be rolled out later today, but we provide below the preliminary details.
1. Unemployed homeowners would be given a reprieve of 3-6 months, during which their mortgage payments could not exceed 31% of their income.
2. The government will double incentive payments to lenders in exchange for modifying second liens. This is a small step in the right direction, as second liens have been a major roadblock to effectively modifying first lien mortgages.
3. The government will increase financial incentives for lenders to facilitate short sale transactions.
4. Similar to the Bank of America announcement detailed above, the government will provide financial incentive for lenders to forgive principal on loans with LTVs greater than 115%. As proposed, the plan would call for lenders to forgive this debt over a three year time period (vs. BAC's 5 year time period). It's unclear what the offsetting financial incentive from the government will be.
5. The government will role out an FHA refinance program, whereby borrowers can refinance their loans up to 100% LTV with the FHA provided that lenders forgive the balance above 100%. For loans where there is a second lien, the FHA will permit refinancing up to 115% on a CLTV basis.
On the flipside, the OCC and OTS released a joint report yesterday with updated performance reporting for loans modified under the HAMP program. The conclusion is that re-default rates remain quite high, though they do seem to be improving with more recent vintages. For instance, 61% of loans modified in 3Q08 had re-defaulted within 12 months. For comparison, loans modified in 4Q08 had a 58% re-default rate after 12 months. On a shorter-term duration, six months out from the quarter in which loans were modified, re-default rates have fallen from 48% for 3Q08 to 34% for 2Q09. This clearly represents progress, but that level of re-default rate suggests that there are ultimately a high proportion of borrowers that are still either willingly (strategic) or unwillingly (job loss) re-defaulting. Principal forgiveness initiatives, should they gain further momentum as we think they will, should help to further improve success on this front, as will generally improving economic conditions.
On the negative front, Bernanke's testimony yesterday raised the risk of the Fed potentially selling some of its Agency MBS paper. We've written in the past about the risks we think exist from the Fed exiting its $1.25 trillion Agency MBS purchase program at the end of this month (i.e. next week). Clearly the Fed would add insult to injury if, on top of removing their $1.25 trillion bid, they also added significant supply to the market.
Conclusion. On the margin, there have been several positive developments in short order for the housing market, with one potential negative. We are currently working on a larger piece looking at the upcoming challenges facing the housing market, and we will explore these themes in greater detail in that report.
Joshua Steiner, CFA