by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate
Readers of the Wisconsin Real Estate Viewpoint will know of our efforts, since early 2009, to think through the best way to tackle the increasing wave of defaults and foreclosures. These foreclosures threaten the fragile stability of house prices, driving them below levels justified by fundamentals—just as circa 2004-2006 a series of bad decisions on financial and regulatory fronts, along with no small amount of "irrational exuberance," drove them above prices justified by fundamentals. In response, we designed something we call the Wisconsin Foreclosure and Unemployment Relief (WI-FUR) plan which provides temporary support to cash-strapped unemployed households to help them stay current on their mortgage.
Let me put a normative statement on the table: in normal times, I would be opposed to a plan like WI-FUR. But these are not normal times: unemployment is still at 10%+, at record duration; a quarter of the nation's mortgages are under water; and house prices are on a knife edge.
If a version of WI-FUR were enacted, some homeowners would be bailed out of bad decisions they made about house purchases and mortgages. More significantly, others would be helped who had made what were, at the time, apparently good decisions; but now they cannot pay previously affordable mortgages; they're unemployed and the value of their homes has fallen below that of their mortgage. (Even if they have positive equity, some unemployed will default because of the income shock, and might end up with a distressed sale rather than a foreclosure; but in today’s environment, large numbers of distressed sales can also lower house prices).
Every foreclosure in today's environment imposes costs on neighbors, the financial system, taxpayers, and the economy as a whole. It's as if houses in our neighborhood have caught fire, some because an irresponsible person was smoking in bed, some because of an unseen short in their electrical system. Before we condemn the smoker, let's put the fire out first before we all burn. (And let's fix the electrical system while we're at it!)
The government’s signature plan to deal with foreclosures is the so-called Home Affordable Mortgage Program (HAMP). Despite $75 billion allocated by Congress to assist up to 4 million distressed households (it was thought), less than 10% of that number of borrowers have received permanent loan modifications so far; and those modified loans are, after the fact, still defaulting at high rates. Some experts predict that up to 2/3 of modified loans will, in fact, default.
HAMP's ineffectiveness is by now well known; see, for example, the July 21, 2010 quarterly report to Congress by SIGTARP (Special Inspector General for the Troubled Asset Relief Program)'s Neil Barofsky; pages 5-7 of the executive summary give an overview. Or see the Government Accountability Office report Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs.
The WI-FUR plan, and complementary plans put forward by our colleagues at the Boston Fed and elsewhere in the Fed system, argue for temporary housing vouchers (or loans) aimed at the unemployed, who have become the majority of foreclosures and who are often effectively (if not "de jure") ineligible for assistance through normal HAMP channels.
Recently our friend Karen Rivedal, who writes the Wisconsin State Journal's real estate blog Property Trax, asked me to comment on a recent variant of the HAMP program called Home Affordable Unemployment Program, or HAUP.
When I first heard of HAUP, I was excited, but my excitement quickly turned to disappointment. Among other problems, it requires that unemployed homeowners go through a fairly bureaucratic procedure to apply for what is (more or less) three months forbearance. And that' s merely the application; forbearance may or may not be granted for the 3 months. Remember, at the present time, the AVERAGE duration of unemployment is 9 months and rising.
(The fine print says you can extend beyond 3 months, but it's not clear that will happen, and will certainly not be clear to potential applicants).
The website's FAQs does not even tell people if the differences between the original payments and the reduced payments, are forgiven, or wrapped into the loan. (When I inquired of the experts in Washington, it turns out part of the loan is forborne, adding to the loan amount, but it’s amazing that they ask people to apply without clearly explaining such a key element of the program!)
What if your unemployment lasts more than three months (which is true for most unemployed today?) After two months you are given an application for HAMP, the dog that won't hunt. As far as I can tell, most unemployed will still not qualify for HAMP after they fill out this application.
There are other details that limit the program’s scope, and hence its effectiveness at halting the skid in housing prices. Homeowners can't get relief on the second liens. And if I read it right, HAUP does nothing for the unemployed not receiving unemployment insurance.
My bottom line: Treasury is still spitting on the fire and leaving the hoses coiled up.