The Perfect Plan To Save The Housing Market: Eliminate All Mortgage Payments

It would be hard to come up with a better way to stop the rising rate of foreclosures than to eliminate mortgage payments altogether. The Office of the Comptroller of the Currency and the Office of Thrift Supervision fourth quarter report on “mortgage metrics” showed that mortgage modifications that cut monthly home payments, including those under which the reductions are substantial, do not work effectively as a way to allow people to remain in their homes. Describing the problem, the OCC/OTS research showed “overall re-default rates remained high with more than half of all modifications falling 60 or more days past due by 9 months after modification and more than half of all modifications were 90 or more days past due by 12 months after modification.”

The problems with mortgage defaults and foreclosures will get worse. In the final quarter of 2009 mortgage defaults increases for the seventh consecutive quarter.  The percentage of current and performing mortgages fell to 86.4% as of December 31, a decline of 0.9% from the previous quarter.  This drop was due to the 21.1% increase in mortgages 90 or more days past due.

The rise in seriously delinquent mortgages was most significant among prime borrowers.  This group increased by 16.5% during Q4 2009.

The Adminstration has come up with a way that it believes will substantially alter the housing market by eliminating some part of the pool of loans that is likely to default in the future. The Washington Post reports that the proposal would mean “banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower’s income, which would typically be their unemployment insurance, for up to six months. In some cases, administration officials said, a lender could allow a borrower to make no payments at all.” Some unemployed homeowners could potentially go months without having to make a single payment on their home loans.The government may also encourage banks to bring down the balances on mortgages that are over 15% underwater.

The Post reports that lending institutions would be paid well for handling loan modifications. The amount would almost double what the government pays financial firms for the service now. The FHA would be asked to help underwater borrowers as well according to the Post. The balance of the details about how the program will work are not available, or, more probably, have not been worked out. The one thing that is clear about the White House plan is that it will be funded from the TARP facility, the same $700 billion program that saved the financial industry as the credit crisis grew.

The fight over the program will be bitter, but not nearly as bitter as the fight over who will have access to reduced mortgage payments, especially if the monthly obligation can go to zero.

This is the latest of a number of programs to prop up the value of American real estate which have been proposed by the Administration. The largest is the $75 billion lending facility set up to support home loan modifications. The theory behind this version of the series of bailout plans is that offering homeowners lower monthly mortgage payments will encourage them to continue to live in their current residences. This in turn will slow the number of foreclosures, stabilize neighborhoods in decline, and puts a floor under falling home prices.

The trouble with each new set of plans is that each has failed to prevent further decreases in home prices.

The new “no monthly payment” iteration should be the most effective of all. It is hard to make a case that people will abandon a home that they can live in free, at least for now. None of this addresses the issue that eventually homeowners will have to make their mortgage payments again.

The cost of the mortgage reductions will accrue  on bank balance sheets. The alternative to that is a taxpayer-supported system that allows banks to avoid taking write-offs. Put simply, someone has to pay the monthly mortgage bills for these people. The “Wizard of Oz” aspect of these proposals is that no one appears to be handed the bill. This means it will become the responsibility of the working American who pays taxes.

This approach is just another set of buttresses put in place to keep home prices from collapsing altogether. There is an economic school of thought that the housing market will eventually find its own bottom, well below its current level, whether or not the government intervenes. A quarter of the nation’s mortgages are underwater, some 11 million homes. Nearly 10% of Americans are out of work, and that number is 17% when the government numbers that accurately reflect the number of jobless are used. In other words, there is not enough consumer capital available to keep home prices from falling, even with the $75 billion that the government has provided along with the additional money that may come from the TARP.

The Administration can make housing free, at least for some Americans. This bandage would help those Americans for a time, but it certainly would not stop the hemorrhage in housing prices.

Douglas A. McIntyre

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