New Federal Homeowner Initiative: The Good, the Bad and the Ugly
The initiative the Treasury announced Friday expands the housing-aid program by offering temporarily reduced payments for more struggling homeowners, including those who are unemployed, financial incentives for lenders that reduce loan balances for these homeowners and improved refinancing terms for Federal Housing Administration-backed loans.
But it's met with skepticism from observers and experts in the real estate and banking industries. "Nobody believes this is going to solve the problem," says Charles Roberts, principal at Your Castle Real Estate in Denver and a member of the city's Board of Realtors. "What they're all doing is preparing for about two to three years of massive short sales."
Roberts thinks the plan will help some 5% to 10% of affected borrowers, but he's also concerned by its unforeseen consequences. "Where did that money come from and what about the family across the street, who are basically in the same circumstances and didn't get help?" he asks. "And wait a second, what about renters who were smart enough not to buy houses? Why [are] their tax dollars going to actually save a homeowner?"
A 'Feel-Good' Plan May Not Be Enough
At best, Roberts says, the initiative is a feel-good plan that shows the government is working to help homeowners and families in trouble. But that might not be enough. "I'm very dubious that this is the right thing to do," Roberts says. "The market is going to have to bottom out and come back up."
Robert acknowledges the Obama administration had made real attempts to help the market, such as by propping up Fannie Mae and Freddie Mac, offering a $8,000 tax break for first-time home buyers and committing to buy as much as $1.25 trillion in home-loan bonds. "But there's literally a cost to that, in terms of money," he warns.
Others believe the plan's success hinges on unemployment. In Georgia, for example, "the fact of the matter is we've got to get jobs," says Scott Trubey, a staff writer at the Atlanta Business Chronicle.
Trade groups and bankers in the state have told him they hope the proposed changes will help stem the tide of foreclosures and take some pressure off borrowers. "Foreclosures wreck communities, hurt property values and decrease tax collections," he said. "A six-month forbearance would help borrowers pay down other debt, too."
Trubey has been covering what he calls the housing market "train wreck" in Georgia, where one in every 331 households received a foreclosure filling last month and where 35 banks -- the most in any U.S. state -- have failed since August of 2008. His sources are pleased the incentives are focusing on equity, such as on home values, instead of just on payments. "Until these people get employment, they're not going to pay in any case," he says.
Defaulting as a Business Proposition
Roberts, meanwhile, is concerned the initiative could actually hurt the higher end of the real-estate market, where borrowers might find it to their financial advantage to opt for a "strategic default," or to walk away from their mortgages even if they can afford their payments.
Two years ago, this option was almost never discussed, Robert says, but now, the stigma of walking away from a property is evaporating. "What we're talking about now are people who are saying, 'Why don't I make a smart financial decision? I can make my payments, but why should I?,'" he says.
And Roberts predicts that the growing social acceptability of defaulting could further damage the economy. "Within months, if not a year, you're going to be at a cocktail party and someone is going to brag about it," he said. "Someone is going to say, 'Yeah, screw Bank of America, I walked away and I saved a quarter-million dollars.' But this would make a terrible precedent in the market and undermine our whole financial system. At the end of the day, [the housing initiative] hurts the very people it's trying to help."