Slow Motion Repeat of Housing Collapse Right Before Our Eyes?

Is the foreclosure storm almost over or as RealtyTrac suggests in its most recent Housing News Report, merely gathering strength to come roaring back?  Octavio Nuiry, Managing Editor of the Report writes that while foreclosure activity continues to wane there is a "tetrad" of housing landmines that could threaten the housing recovery and trigger a surge in defaults, repossessions, and short sales.

The tetrad consists of defaults in loan modifications done under the Home Affordable Modification Program (HAMP), Home Equity Line (HELOC) resets, and 8.1 remaining underwater borrowers and non-performing loans.  The article Housing Landmines:  Are Mortgage Flares Up (sic) Coming Soon? States, "The foreclosure crisis hasn't receded, it was intentionally delayed by government manipulation.  The can was kicked down the road.  And next year, foreclosure activity could spike again."

The article reprises information previously reported about the looming HELOC resets and the remaining pool of delinquencies and underwater mortgages, but its indictment of HAMP is somewhat stunning.

Nuiry recounts the history of HAMP, from the time it along with its companion the Home Affordable Refinance Program (HARP) were announced by President Obama in February 2009.  At that time one in five homeowners owed more on their mortgage than their home was worth, completed foreclosures were running over 300,000 per month and home prices had fallen by nearly a third from their peak.  The two new programs were set up to pay lenders an incentive fee for each modified or refinanced loan and the President forecast the two would assist between 7 and 9 million families.

Ultimately only 1.4 million homeowners got a modification (by July 2014) and 350,000 have defaulted and lost their homes.  While the article initially puts the blame on "government manipulation" it actually appears to have plenty to spread around.   

The administration, or at least Treasury Secretary Timothy Geithner, it says didn't intend it should really work.  Neil Barofsky, former Special Inspector General of the Troubled Asset Relief Program (SIGTARP) is quoted as saying Geithner told him that HAMP was not designed to assist distressed borrowers but to help banks ride out the crisis.  "We estimate that they (the banks) can handle ten million foreclosures over time," Geithner was alleged to have said. "This program will help foam the runway for them."

Former Federal Deposit Insurance Program Director Sheila Bair said the program was designed to look good in a press release, not fix the housing market.  She believed the program was too rigid in its qualification requirements and that the banks would scuttle it.  In her book Bull by the Horns Bair said "To require every borrower to essentially prove that he or she could qualify for a new loan was stupid - the loan had already been made."

Attorney Jennifer Taub, whose book "Other People's Money" is reviewed elsewhere in the magazine, believes the banks are to blame, saying that HAMP didn't work because the banks didn't want it to.  They dual-tracked homeowners, stringing them along with the promise of modifications as foreclosures were processed.  "Several Bank of America employees claimed that they had frequently lied to homeowners and were paid bonuses if they sent them into foreclosure."

Then there was money; at the start there was $75 billion earmarked for HAMP modifications, about 11 percent of that reserves for the banks.   In 2010 that was cut to $30 billion and in the end only $4 billion was spent.  Still the HAMP program as well as HARP were recently extended through the end of next year.

And now, Nuiry says, the chickens are coming home to roost.  For those borrowers who actually got a HAMP modifications (one in six of those he says who applied), rate resets are on the horizon.   Ninety percent will see increases in their mortgage payments between now and 2021, 30,000 in the next year.  The reset rates will range from 4 percent to 5.4 percent and will be concentrated in four states, California, Florida, Illinois, and New York.

According to a report from SIGTARP, "The longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program.  Redefaults of the oldest HAMP modifications are at a 46 percent redefault rate, a rate that continues to increase as the modifications age."

Nuiry goes on to quantify the danger posed by the HELOC resets.  As these loans reach the end of their open or draw down periods they change from interest only to fully amortizing loans, substantially increasing the monthly payment. An average of $53 billion of these loans will reset each year between 2014 and 2017.  TransUnion estimates that nearly half of HELOCs have balances in excess of $100,000 and that some $79 billion of the loans will be at "elevated risk" of default.  These loans were not widely securitized the way first mortgage liens were and many remain on the books of the nation's largest banks.

The RealtyTrac article concludes with the statement "Indeed, the collapse of the U.S. residential real estate market is happening again right before our eyes in slow motion."  It adds that the majority of the houses sold in the U.S. last year were bought by institutional investors and this spike in buying for cash caused housing prices to rise over the last two years.