Little Hope for Housing Blues

 | Feb 01, 2012 | 6:00 PM EST
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Although I mentioned the Obama administration's newest housing and mortgage refinance plan briefly yesterday, I've received so many questions about the program I decided to write about it in a bit more detail today.

The most often asked question is: Will this program work?

If the word "work" is being used as an umbrella term to describe halting value declines and defaults and foreclosures in the housing sector when measured on a national average basis, than my first response is simply to say no. As we discussed yesterday, if the administration, Congress and the banks wanted to halt value declines and foreclosures, they would have already done so.

The problem facing the housing market is very simple, and a corrective measure targeted at that problem is as well. The political will to admit what the problem is, define it, and then enact legislation to thwart it is lacking.

Home values are still falling and the administration's new plan is essentially to allow mortgagors to apply for a refinance of an existing mortgage without the lender being able to disqualify them for a lack of equity in the collateral. This should have been pursued years ago and it will provide some relief for a very small number of borrowers. However, statistically, this program will prove to be as meaningless as all of the previous programs.

The administration contends that up to 10 million homeowners may qualify for this new plan. This is simply wrong because it does not take into account mortgagors who cannot qualify because of income or credit issues.

The majority of the subprime credit problems that led to the housing bubble and eventual collapse were because people were afforded the opportunity to buy homes without consideration of their income or credit.

Today that is no longer true. What is stranding these borrowers from being able to refinance is not their lack of equity; it's their lack of income and low credit scores.

The very first thing a mortgage underwriter takes into account when considering whether or not to go further into a loan application is the borrowers' credit score and history. If a person's credit score is low, he will not qualify, the loan will be denied, and questions concerning income and home equity will never even be considered. The new plan being rolled out by the administration pays lip service to this fact by lowering qualifying credit score requirements to 580.

But because credit score calculations have changed to take negative equity situations into account, which depresses scores, since the housing crisis began, many homeowners will not meet this new minimum level -- even if their mortgage is current.

It is not possible, in my opinion, for the administration to not be aware of this because they are simultaneously investigating mortgage lenders and MBS packagers for not disclosing to their buyers the fact that they did not employ due diligence with respect to income and credit of the borrowers they were lending to.

You can't have your cake and eat it, too. The administration should admit that some large portion, probably a sizable majority, of stranded homeowners are being precluded from refinancing for issues that have nothing to do with what this new plan is targeting. Instead, they just pretend that is not the case.

However, desperate homeowners will want to believe -- much like a terminal cancer patient hopes the next alternative therapy is going to save them. Lenders will not tell applicants upfront that they will not qualify for this program (which was also the operation scenario for the previous programs).

Lenders will have to accept applications and put them through an underwriting process so that they can compile the data and information to be presented to regulators proving that they complied with the process. That process may take months for each individual application. Ultimately, the homeowner will receive an official denial because of a lack of income or poor credit; something the borrower could have been told upfront within the first few minutes of an interview by a loan officer.

During the interim, the applicant will wait, hoping that this time will be different, that this program is different, and that they will be able to keep their homes with lower mortgage payments. None of this will prove to be of any more help for housing, the economy, the banks, or homeowners than any of the previous programs.

The worst case outcome, and probably closer to reality, is that it will cause consumer confidence to decline even further -- and the consumer is the engine of economic activity.

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