Posted on Wednesday, October 6, 2010
If governmental policy on foreclosure prevention does not change, 11.5 million borrowers are in danger of losing their homes, according to the analysts at Amherst Securities Group LP.
The staggering figure put forth by the mortgage investment brokerage equates to one out of every five borrowers – an astronomical 20 percent default rate that Amherst says “politically cannot happen.”
The dire forecast should be a wake-up call to regulators and government officials charged with plugging the nation’s foreclosure tsunami, and the analysts at the New York-based firm say they do believe “the government will attempt successive modification plans until something works.”
But up to this point, the administration still hasn’t hit on a successful equation. Reports on the progress of the Home Affordable Modification Program (HAMP) seem to grow more disappointing with each month’s new dataset. Treasury’s August report showed that nearly half of all homeowners approved for trial HAMP mods have already fallen out of the program.
Amherst’s report warns that while recent industry data shows a drop in the number of delinquent loans, this information is skewed. According to the firm’s analysts, this so-called “improvement” simply reflects large-scale modification activity. The study explains that modifications are being flagged as “current” often with no cash flow from the borrower.
The firm’s analysts say, the bottom line is that 20 out of every 100 U.S. first lien residential mortgages are already impaired:
Nine are seriously behind in their payments.
Six have been behind and are classified as what Amherst calls “dirty current” because they have been modified. But the firm says these loans are re-defaulting at an eye-popping rate of 50 percent.
Five are underwater by more than 20 percent of their current value and are defaulting at a 20 percent per-year-pace.
So how can the administration fix deficiencies in its loan modification program and keep the mortgage default rate from hitting the menacing 20 percent mark? Amherst analysts say the answer lies in cutting borrowers’ principal balances.
They argue that the success rate on mortgage modifications can be raised by making greater use of principal reductions. Amherst says this approach would help to address the phenomenon of strategic default, which is becoming increasingly acceptable among frustrated borrowers. Policymakers must first recognize that the inclination to walk-away from one’s mortgage has become an economic issue, not a moral one, according to Amherst. In addition, the costs of default must be made explicit, and the second lien issue must also be addressed.
Unfortunately, it is unlikely that these foreclosure-prevention policy changes will be sufficient to address the housing crisis, according to Amherst. The firm says additional government intervention is needed to boost housing demand.
Amherst recommends that the government provide leverage for investors to buy real estate, ideally through its federal housing agencies – the Federal Housing Administration (FHA), Fannie Mae, or Freddie Mac. Currently, Fannie and Freddie credit availability for investor properties is very limited, requiring large down payments and pristine credit, while FHA is for owner-occupied homes only.
Amherst says just when the market needs to increase demand for homes, demand is actually contracting due to credit availability issues. The firm’s analysts say new financing channels should be opened up to investors, noting that investors are currently purchasing a disproportionate share of foreclosed properties for cash.
In addition, Amherst recommends increasing credit availability on prudent terms to borrowers with less than pristine credit.
The large numbers of borrowers who have defaulted or will default on existing mortgages will, under present programs, be locked out of owning a home for years, but the company’s analysts say this setback can be addressed by re-qualifying borrowers who are in a home they can’t afford into one that better fits their financial situation.DSNews