Monday, December 19, 2011
Fixing Our Housing Crisis
By Bruce Bialosky
There was our President stating once again that he had a plan to fix the housing crisis that is stalling our economy and harming his reelection chances. When he was done making his proposal, it occurred to me that after 35 years of my working in the real estate market this man really had no more idea of how to resolve the problem than the average homeowner. Unfortunately our President and his advisers are clueless and potentially deleterious to the process.
The plan is a follow up to a prior plan known as HARP (Home Affordable Refinance Program) which did not quite achieve what it was aimed to do. About 850,000 people did refinance under the program, but the housing market barely blinked and more houses are underwater and in foreclosure than before HARP with no discernable end in sight. The President, being the President, feels that government is the solution to all problems (even the ones it created – such as the housing crisis). He lurched into a new plan that he believes will be the magic elixir for eroding home prices.
While I immediately observed HARP was not the solution, I contacted someone who works with the loan market every day and really understands the problems that still exist. He does not have a Harvard degree and that may be why the President did not call on him. He is Kent Kirkpatrick, one of the owners and CFO of American Capital. American Capital (AC) is a mortgage banker. They are the main street crowd that creates the loans for the housing market. Kirkpatrick, the company compliance officer, stated when the rules were being loosened in the middle of the last decade, AC refused to go along with the game. He lost a lot of folks who went to players like WAMU, who were offering fat compensation packages for people creating the loans the government had requested, and he lost a lot of sleep wondering whether he had done the right thing. Now his company thrives when 93% of mortgage bankers across the country have closed shop.
I asked him about the new version of HARP that the President has instigated on his own without Congressional support as part of his war on Congress. On October 24th, the New York Times applauded the President by stating in their editorial page “At long last, Fannie Mae and Freddie Mac, the government-run mortgage companies, have issued new rules to allow millions of underwater borrowers, who are current on their payments, to refinance their high-rate mortgages into lower-rate loans.” Kirkpatrick stated at the time he could not even comment since the rules were actually being issued November 15th. When I finally caught up with Kirkpatrick after Thanksgiving he told me that Fannie Mae and Freddie Mac will not even be considering the loans until at least the end of 2011 or sometime in late February 2012, and that his company will most likely not even touch them.
Kirkpatrick first answered my question: “If Fannie and Freddie knew these people were current on their loans, why couldn’t they just send them a notice lowering the borrowers’ interest rates?” I told him that despite all the numbers bantered around in the media, the numbers were not accurate. The average interest rate for the same quarter four years ago was 6.23% and the average for the last quarter was 4.14%. A homeowner with a $100,000 mortgage would save about $129 per month, or $1,547 per year. A borrower with a $300,000 mortgage would save $389 per month, or $4,644 per year. Kirkpatrick stated that the government operations really did not own the loans; they just secured the loans so they did not know where the loans were held. How they were to determine who would qualify would have to go through a new loan process. The house organ of the Obama Administration, aka New York Times, stated that between 1.5 million to 2 million people will qualify under the new program, and this will work as long as the bankers don’t “lard up the new loans with excessive fees.” This statement could not be further from the truth.
First, the President suggested that appraisals be waived. Kirkpatrick made clear no one in their right mind would do a new loan (which is what this is) or even redo a loan without inspecting the existing structure. That is the kind of decision that got us in this position in the first place. After all, how does the lender even know the house is still standing or is not seriously damaged?
Second, Kirkpatrick made clear what the major problem is with the entire program. It is something referred to as “Representations and Warranties.” Whoever put together the loan puts together information that they represent to the eventual buyer of the loan to be true. A thing like whether the house is standing, the value is real and the borrower is alive and has a means of payment are what the loan processor is responsible for on the loan. If the loan goes bad, whoever ends up with the paper can kick it back and a company like AC can get stuck with eating the entire loan. No one wants to assume that responsibility on a loan that is 150%-175% of the value of the property. There is tremendous incentive for the borrower to walk.
So who did the estimated 850,000 loans in the first version of HARP? Kirkpatrick observed that the big banks did these to accommodate the Obama Administration even though AC would not get near them. He went on to say that as appreciation for the help from the big banks, Fannie and Freddie are now kicking them in the backside by reviewing all their loans from the good old days of 2008 and back to see if there are any flaws in the paperwork. This is when Fannie and Freddie were instructing the banks to give them any loan no matter the quality of the paperwork. Now the banks are being stabbed in the back for those loans. What does anyone deduce will happen with these new loans, a large portion of which are destined for the foreclosure pile? Kirkpatrick does not want to find out.
There were rumors the government was loosening the Representations and Warranties on these refinanced Fannie Mae and Freddie Mac loans, but that does not appear to be happening. Thus, this program will die with a soft thud unless the New York Times takes a bat to bankers for greed that never existed and misses the flaws in the program that brought it to failure. Kirkpatrick agreed with the position taken by Mitt Romney -- the government needs to get its hands off of trying to fix the home market. They are just prolonging the problem. The politicians need to leave professionals like Kirkpatrick alone, and let them do the work for which they are trained and about which they are knowledgeable, to get the housing market back on track.
To read another article by Bruce Bialosky, click here.
Posted by Brett at 5:48 PM