Lenders mostly dismiss "Hope for Homeowners" Bill

Remember that huge housing bill passed by Congress in July in which the FHA would re-write toxic mortgages if lenders would only reduce loan balances by 10%? Apparently lenders are saying "Thanks for thinking of us, but no thanks, we'll do our own workouts. Have a nice day!" From a CNNMoney.com story:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn't seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

The program calls for lenders to voluntarily refinance delinquent mortgages by reducing loan balances to 90% of a home's current market value. The new loans will be backed by the FHA, which will be receive 5% of the new loan balance as a payment from the lender...

Bank of America (BAC, Fortune 500) managing director Michael Gross said that the new FHA program was just one of many loan workout options that the bank is employing.

And he stressed that the bank's own efforts to save troubled loans, especially those B of A inherited when it bought Countrywide, have been successful. He said that the bank increased its loan modifications by 450% this past August compared with August of 2007.

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

And Mary Coffin, speaking for Wells Fargo (WFC, Fortune 500), testified that relatively few of her bank's borrowers owe more on their mortgages than their homes are worth, meaning they would be unlikely to benefit from the FHA's refinancing and write down program...

Even Sheila Bair, who heads the Federal Deposit Insurance Corporation, praised the FHA program but said that few borrowers with IndyMac, the bank that the FDIC took over in July, would use it.

She said that her responsibility to maximize profits for the investors would probably limit the number of IndyMac borrowers who would take advantage of Hope for Homeowners

Builders hurt by housing bill?

It looks like the housing bill so quietly signed into law by President Bush both giveth and taketh away from homebuilders. Although it permanently raises the limits on FHA loans to 115% of the median household income and offers a unique $7,500 tax 'credit' (i.e., a loan that must be paid back over 15 years), it also eliminates the down payment 'charities' that some builders said helped up to 30% of their buyers leap over the down payment hurdle and close the deal. The Wall Street Journal explains:

Although a bill aimed at reviving home sales and curtailing foreclosures is about to become law, some of its provisions are proving a drag for the nation's large home builders...

There have been months of intense lobbying by the building industry, but analysts say the legislation is a mixed bag for the new-home market. On the bright side, the bill shores up mortgage giants Fannie Mae and Freddie Mac, which should help restore some confidence in the mortgage market. It also provides a $7,500 tax credit to stimulate demand among first-time home buyers.

But for the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market, according to an analyst.

Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder. Currently, the FHA allows a nonprofit group to gift the down-payment to the buyer. The nonprofit group is then reimbursed by the builder -- a practice the housing bill would stop...

Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year...

Complicating matters further for the builders, the housing bill would increase the down-payment requirement on FHA loans to 3.5% from 3%. Previous versions of the measure had lowered the down payment to 1.5%.

"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance...

On a brighter note, builders say the housing bill could boost higher-end sales by raising the conforming-loan limits on Fannie- and Freddie-guaranteed loans and FHA loans to a maximum of $625,000 in some high-priced areas.

But many of those higher-end sales will depend on whether buyers can sell their current homes, often to first-time home buyers, which is why builders say the tax credit will help the overall market.

Will President Bush sign the housing bill?

A key Senate panel has OK'd legislation to help the ailing housing market. MarketWatch reporter Rob Schroeder talks to John Wordock about where the measure goes from here and whether President Bush is now likely to sign it (audio clip).

The long-term damage of foreclosures

Perhaps the most important thing I've learned reading comments on housing blogs is how many people (especially the knee-jerk "No Bailout!" crowd) don't really understand macroeconomics. I can certainly see why -- when I was in college I used to joke, "I'm an econ. major but that doesn't mean I'm boring!" because the array of numbers, tables and graphs in beginning economics classes was enough to put most people to sleep (something I've discussed with economics professors I know, but they're very committed to the teaching of theory first).

Where economics gets interesting is in the application of its theories, and few places test the combination of psychology and money more than in the housing market, which is actually a giant puzzle of various trade-offs. That's why it's interesting that Dr. Robert Shiller -- co-founder of the S&P/Case-Shiller housing price index and a Princeton professor -- opined in the New York Times over the weekend that the rising foreclosures in this country, coupled with the often hypocritical tsk-tsks of the less tolerant, could very well have a long-term impact on the psychology of the American consumer. Frankly, I'm just happy that an economist has emerged from his ivory tower long enough to see things from a perspective that isn't simply an objective discussion of numbers alone. From his article:

ACROSS the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.

It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign...

This stern view may, in fact, be winning the battle of public opinion. On May 9, the House approved legislation aimed at helping some of the people facing foreclosure, but the president has said he would veto it...

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

But instead of having sympathy for these homeowners, many people blame them for their predicaments. That isn’t surprising. It’s an example of a general tendency that was documented by social psychologists decades ago.

In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” Melvin Lerner, a social psychologist, argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who appear to be suffering are in fact responsible for their own situations. He provided empirical evidence, derived from experiments, that after an initial pang of sympathy, people tend to develop negative views toward others who are suffering. That negative tendency seems to be at work today.

Second, it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family’s furniture on the sidewalk when it happens. Nonetheless, there is deep trauma.

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

But we are now seeing the president’s Ownership Society plan operate in reverse. Already, the homeownership rate has fallen — from 69.1 percent in the first quarter of 2005 to 67.8 percent in the first quarter of 2008. That’s almost back to the 67.5 percent level where it stood when Mr. Bush took office in 2001. And it is likely to fall further.

The pain of this reverse movement could leave a psychological scar that will be with all of us for the rest of our lives.

White House gives mixed signals on housing bill

If we ever had a "decider" in the White House, apparently that doesn't extend to the best ways to address the housing bust or even to negotiate in good faith on a compromise bill. From the New York Times:

Even as the housing foreclosure crisis deepens, legislation to rescue homeowners and their lenders appears to be in significant political jeopardy.

The bill, which passed the House on Thursday, is quickly becoming a casualty in a battle between the Bush administration, which says it opposes any taxpayer bailout that would only further encourage risky lending practices, and Democrats who say that homeowner assistance is the only way to contain the damage to the broader economy.

Despite pledges by the White House and Democrats to work together, the bill produced partisan recriminations the day after it passed the House. Democrats are charging that the administration has sent mixed signals on whether it even wants a bill. In a twist, Democrats sought to claim the support of Ben S. Bernanke, the Federal Reserve chairman, who this week called on Congress to help mortgage holders. That claim prompted a spokeswoman for Mr. Bernanke to deny that he was favoring any piece of legislation over another.

The Democrats also said that Treasury Secretary Henry M. Paulson Jr. appeared at first to encourage their bill, or at least not stand in its way. But Mr. Paulson’s spokeswoman vehemently denied that...

The measure now goes to the Senate, where it faces opposition among Republicans who have tapped into a broad wave of bailout resentment in states less affected by the crisis. And the failure of the House to adopt it by a veto-proof margin is likely to further embolden recalcitrant Republicans in the Senate who have so far managed to block action, Democratic supporters of the measure said on Friday.

Senator Christopher J. Dodd, the Connecticut Democrat who heads the Banking Committee, said Friday that he was hoping to quickly complete negotiations with the ranking Republican on the committee, Senator Richard C. Shelby of Alabama, and have the committee vote on a measure next week...

Under the voluntary plan that was approved by the House, borrowers at risk of default would be able to refinance their loans at a more affordable 30-year fixed-rate mortgage insured by the Federal Housing Administration.

In exchange for avoiding foreclosure, lenders would have to agree to reduce the principal balance. The borrowers would pay a monthly insurance fee that would go to a fund to protect taxpayers from losses. A consensus was emerging on Friday that if Congress adopted a measure, it would likely be far more modest than the one passed by the House, which itself has been criticized by housing groups for being too small.

Still, there is a clear split among Republicans, and perhaps within the administration, over how to proceed. Last month, Senator John McCain, the presumptive Republican nominee for president, sharply pivoted and called for government aid to homeowners in danger of losing their homes.

His plan was more modest than the Democratic plan. But it was notable because, only a month earlier, he had warned against broad government intervention to solve the mortgage crisis, saying it was “not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

Democratic strategists said the change reflected the importance on the electoral map of states like Florida, Ohio and Michigan, all hit hard by the crisis...

After administration officials engaged in talks with House Democrats over their measure, President Bush said on Wednesday that he would veto it. The Democrats say they made several changes sought by the administration in an effort to gain its support. But in a statement of administration policy, the White House said the legislation was burdensome and prescriptive.

“It would force the Federal Housing Administration and taxpayers to take on excessive risk, and jeopardize F.H.A.’s financial solvency,” the statement said.

Even lawmakers who have criticized some elements of the House measure said they were hearing mixed signals from the Bush administration.

“I was surprised by the White House threatened veto,” said Senator Mel Martinez, a Florida Republican who served earlier in the Bush administration as the secretary of housing and urban development. “The White House message has not been consistent.”

Mr. Martinez said that the “obtuse” nature of the veto threat suggested to him that the administration had issued it as a negotiating tactic.