You can hear the drums beating in the distance on President Obama’s network of initiatives to get the housing market stabilized.
While the Home Affordable Modification Program, Home Affordable Foreclosure Alternatives Program and all the other federal initiatives were needed back in 2008 and 2009 to prop up a decimated housing market, it might be time to bring all these layers of complexity to a conclusion.
It’s not only that HAMP and all its brethren have been expensive, but it’s been apparent for a long time now that these programs are not really working out very well. Despite best intentions, as of August, fewer than 500,000 borrowers have successfully made it through the HAMP trial phase and the number of people falling out of the program is increasing.
One can argue that all of these programs aimed at keeping people in their homes were flawed in design, and that is the administration’s fault; or that the programs were fairly basic in concept but the lenders in an extremely passive-aggressive manner simply couldn’t — or wouldn’t!! — put these initiatives into gear.
But that doesn’t get to the heart of the matter, which is: Four years into the real estate downturn and two years into home retention efforts, it might be time let market forces take over again.
The problem, as some see it, is government intervention only forestalls the eventual day of reckoning.
The housing market was somewhat shocked in July when the National Association of Realtors reported sales of existing homes declined 27.2 percent, which was the result of the first-time homebuyer tax credit program coming to an end.
Again, this could be taken as evidence that the program only juiced the housing market with steroids and if left to its own natural path would have come to the point of record decline much earlier and thus the market would have started earlier picking itself up from the bottom.
Government intervention has also attempted to keep homeowners afloat — a worthwhile objective. Others, however, argue that homeowners who are underwater really can’t be rescued no matter how hard the government tries. After all, redefault rates on HAMP modifications, according to Fitch Ratings, could reach between 55 percent and 75 percent of completed mods.
"Loan modifications are failing," said Kelly Garland, managing partner of Steel Mountain Capital Management LLC in Littleton, Colo. "If you can’t make it under the terms of HAMP or some version of it, you don’t belong in the house. Credit is a luxury, not a right."
Garland understands the government had to act to stabilize markets; he has no problem with that. It’s just that he believes that intervention has to come to an end.
"Some programs the government had to do, because clearly everything was out of control and decisions were made because of what was going on at the time. The feds, (former Treasury Secretary Henry Paulson), etc., did what they had to do given the circumstances," said Garland. "But the follow-ups are not having any effect."
He added, "I don’t think in HAMP’s current form it is doing the things it could have, and ultimately it is delaying an inevitable process. The market comes to equilibrium because of participants on either side. Third-party, government intervention was only moderately successful at best and not successful at worst."
Not all industry insiders agree with Garland.
Sylvia Alayon, senior vice president of Fort Lauderdale, Fla.-based Consumer Mortgage Audit Center, believes ending federal government mortgage initiatives would be a big mistake.
"There are those out there who think we should just let the market run its course and let the dust settle so that the recovery process can begin," she said. "I disagree with that."
To Alayon’s way of thinking, the let-the-dust-settle concept implies that the recovery would be short term, which, she noted, would be mathematically impossible.
"If you look at the current inventory," Alayon explained, "and if you were to add the projections of foreclosures, because they are still on the rise, and if we continue at the same pace, we would have an excess inventory amount that would take us at the minimum 10 years to exhaust — the economy would not change for 10 years!"
This doesn’t mean Alayon is happy with the way the government has been trying to stabilize the mortgage market and reduce foreclosures.
"The key to stopping the bleeding is devising a system that looks at the entire financial picture of the homeowners and focuses on affordable payments," she asserted.
"Too much focus is being placed on the reduction of principal balance. That’s not the issue. If these homeowners were concerned about being upside down in equity, they would have walked away already. All the programs that are being rolled out are focusing on the underwater issue. That’s not the real issue. I’d rather see the effort focusing on getting affordable payments to more homeowners."
Alayon is also not happy with recent legislation aimed at monitoring rules and laws related to origination activity.
"We have just spent a lot of time, energy and money putting a bunch of rules in place for a segment of the market that is non-existent. Nobody is lending, there is no activity out there," she said. "I would prefer to see this energy being expanded toward putting regulations and laws in place that are consumer-oriented in regards to foreclosures and loan modifications."
Many people who work in the mortgage and single-family transaction business don’t begrudge the federal government’s heavy-handed involvement with the industry back when it looked like the country’s economic foundation was about to convulse.
There was a lot of fear back then and no one knew what would happen going forward. Now it’s two years later and we all — and the economy — survived.
The question at this point is: Do we still need the government to be so involved, and if so, maybe the focus and breadth of its management style needs to be redirected?