A Solution to the Housing Crisis Could Be at Hand
The housing crash erased $6.5 trillion from the value of Americans’ homes, and the market remains deeply depressed, with prices retreating in November to just 1 percent or less above their crisis lows. And still: Something good has been happening lately. Lenders and government agencies have finally begun to understand how to deal with the crash by efficiently saving the homes of people who can afford to stay in them—and quickly recycling the properties of delinquent borrowers who are beyond hope. That triage, while painful, is a prerequisite for the eventual recovery of the housing market. “I am optimistic,” says Mark Fleming, chief economist of CoreLogic, a Santa Ana (Calif.) data and analysis company. “You can see the wounds ever so slowly beginning to heal now.”
That healing process is good for the economy as a whole. While housing starts are still running at only one-third of their 2006 peak, they’re up from their 2009-11 lows, and residential investment has contributed positively to the growth of gross domestic product since the second quarter of last year. JPMorgan Chase Chief Executive Officer Jamie Dimon told investors and analysts in a January conference call that housing is “getting closer” to a bottom. “We’re going to add 3 million Americans every year for the next 10 years. That’s 30 million Americans who need 13 million dwellings,” he said. “Mortgage underwriting will loosen, not tighten. If you put all those things together, you’re going to have a turn at one point.”
Unclogging the legal and financial system is key to the recovery. The latest improvement is an upsurge in lenders’ enthusiasm for short sales as an alternative to foreclosures. In a short sale, the lender accepts less than the full amount owed on the mortgage when a house is sold. Short sales are much faster than foreclosures and tend to preserve more of a home’s value. (People who leave voluntarily are less likely to punch holes in the walls and steal the copper wiring.) JPMorgan Chase in some cases offers the exiting homeowners $10,000 to $35,000 in cash at settlement, real estate agents in Arizona, California, Florida, New York, and Washington say. Other banks also offer incentives.
The embrace of short sales may well depress home prices further by flooding the market with fresh supply. But it’s a sign that lenders are facing up to housing’s new reality, says Raphael Bostic, Assistant Secretary for Policy Development and Research in the U.S. Housing and Urban Development Dept. “The notion of a short sale runs counter to intuition for a lot of bankers,” says Bostic. “In a short sale you actually are losing money. What was not fully appreciated is that a short sale today can actually minimize your long-term losses.” To help displaced homeowners, HUD is devising a plan to convert such homes into rentals.
Aside from cash incentives, lenders are also nudging along potential short sales by pre-approving deals, streamlining the closing process, and forgoing their right to pursue the unpaid balance of the loan, says Bill Fricke, senior credit officer at Moody’s Investors Service in New York. Short sales accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, according to CoreLogic.
Government is getting smarter about what works and what doesn’t, too. Economists at Goldman Sachs estimated in a Feb. 8 research note that over the next two years recently announced or recently implemented policies could reduce the flow of distressed properties onto the market by as much as 800,000 units. The note was titled “Housing Policies: No Silver Bullet, but Small Programs Begin to Add Up.” Government efforts to help overextended homeowners failed in the early stages because the criteria were too strict. That’s changing. An example is the Home Affordable Refinance Program (HARP), which is for people who are current on their mortgage payments but can’t qualify for a traditional refinancing because their home’s value has declined too much. Begun in 2009, HARP was relaunched last October as HARP 2.0 to open it up to more people. One change: allowing refinancing by people whose loans are more than 125 percent of their homes’ value.
HARP 2.0 is so popular that Bank of America has been overwhelmed by refinancing applications and is telling some people to come back in 60 to 90 days. On Feb. 1 the White House asked Congress to tweak HARP to make even more people eligible. It’s also expanding HARP’s sister, HAMP—the Home Affordable Modification Program, which lowers people’s loan payments to 31 percent of their pretax income.
Yet another boost to struggling homeowners is the tentative $25 billion settlement between state attorneys general and loan servicers over foreclosure documentation abuses. About $17 billion of that sum is set aside for debt forgiveness and loan modifications. The deal isn’t final, but it’s likely to have less of a macroeconomic impact than the other initiatives. Depending on how the settlement is distributed, says Paul Willen, an economist at the Federal Reserve Bank of Boston, “it’s either a little bit of money for a lot of people or a lot of money for not very many people.”
The biggest obstacle to getting housing on sounder footing is uncertainty over who holds the title to mortgaged homes. Judges are refusing to approve foreclosures when the paper trail is corrupted—the screw-up that the state attorney general settlement punishes. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Fla., says representatives of a large bank told him that it gives short-sale incentives primarily when it doesn’t have the proper paperwork needed to win a foreclosure case. He declined to name the bank for publication.
Kris Pilles, a Riverhead, N.Y., real estate broker who represents banks, servicers, and hedge funds that own distressed housing debt, says his clients have paid as much as $92,500 to get someone out of a home. “Money talks,” Pilles says. That’s the new pragmatism in housing finance—hey, whatever works.
— With assistance by Hugh Son