Two days ago the Obama administration launched one more program to “help” homeowners facing foreclosure. Here’s the thumbnail sketch of the program:
The program functions by giving out interest-free loans to homeowners who meet the program’s guidelines. NeighborWorks says the borrowed funds will pay a portion of an approved applicant’s monthly mortgage including missed mortgage payments or past due charges including principal, interest, taxes, insurance, and attorney fees; a homeowner can borrow up to $50,000, or two years’ worth of loans to supplement mortgage payments, whichever comes first. The EHLP program is expected to assist 30,000 homeowners through the program, with an average loan amount of about $35,000, says NeighborWorks.
The $1 billion of funding for the EHLP program complements the $7.6 billion in the Hardest Hit Fund, established for the states hardest hit by the housing crisis; with today’s launch, says HUD, mortgage assistance is now available for unemployed and underemployed homeowners in every state.
This is one in a long line of attempts to help “stabilize” the housing market. According to a recent study by Kansas State finance professor Eric Higgins and Columbia professor Joseph Mason though, if the administration really wanted to help the housing market, they’d stop the “stabilization” efforts and let the foreclosures go through.
Because the terms of the proposed servicer settlement call for banks to do more on forgiving mortgages, the studies say it would only encourage more homeowners to strategically default on their loans. Delaying or prolonging the foreclosure process doesn’t help either because it prevents the market from recovering.
“In no way do our studies suggest that foreclosure is a good thing,” said Higgins, von Waaden Chair of Investment Management and head of the department of finance. “It is very unfortunate, but to delay the foreclosure process doesn’t help anybody. It doesn’t help the homeowner who is in debt and can’t get out of debt. It’s not helping the economy because we can’t find the bottom of the housing market. And it’s not helping neighborhoods because you have neglected houses.”
So what would help?
Completing foreclosures and clearing bad mortgages is the best way to help the market improve, Higgins said. According to the studies it takes an average of 17 months for a foreclosure to happen — and during that time, the home can be sitting, becoming run down and declining in value.
“By delaying foreclosures and modifying mortgages, all you are doing is prolonging the borrower’s problems,” Higgins said. “Statistics show that mortgage modifications don’t really work and people are eventually going to be in a situation where they are unable to pay the adjusted mortgages. It gives borrowers who are in trouble a sense of a false hope and encourages other borrowers to engage in strategic default.”
Now the market finds itself in a cycle full of bad news. As long as foreclosures remain in limbo, no one will know the bottom of the market. In turn, homebuilding won’t pick up until builders know where the market bottom is.
While letting the cycle of foreclosures run its course is undoubtedly the cheapest, fastest solution. It’s not a solution that’s liable to appeal to politicians. It’s not sexy. It would make for a boring press conference. It would mean that legislators couldn’t have their names on some long, impressive looking bill. It would open up its supporters to critics who decry legislators who do nothing.
This new program won’t help stabilize the market, nor will the next program, whatever it is. With luck though the market will eventually stabilize– in spite of the housing stabilization programs.