There are both positive and negative aspects to President Barack Obama's Homeowner Affordability and Stability Plan (HASP) announced on Wednesday last week.
On balance, "the plan is a positive first step in stabilizing the U.S. housing market," according to Westwood Capital.
HASP was designed to help between seven and nine million families restructure or refinance their loans to avoid foreclosure. Of that total, four to five million people will be allowed to refinance their existing Fannie Mae or Freddie Mac mortgages into lower rates, resulting in lower monthly payments.
For the other three to four million at-risk homeowners, the government will fund a $75 billion initiative that encourages loan modifications to bring monthly payments to sustainable levels; gives servicers an upfront fee of $1,000 for each eligible modification made; provides $1,000 a year for five years to reduce the loan's principal balance if the homeowner stays current on his loan; and creates a $10 billion insurance fund designed to help protect the servicer against further home price declines and to encourage servicers to modify loans rather than foreclose.
The final piece of the package aims to reduce mortgage rates by improving confidence in the GSEs, by increasing the Preferred Stock Purchase Agreements to $200 billion each from $100 billion, and by raising the size of the agencies' portfolio limits to $900 billion from $850 billion. The plan would also allow for cram-downs for borrowers who have no other options.
Westwood Capital hails the plan as "welcome news for those able to benefit from the new initiative, as well as for the troubled U.S. housing sector."
For one, Westwood noted that Obama's plan is aimed at responsible homeowners who are having trouble making their monthly payments or refinancing into new loans. It also calls for reducing the borrower's principal balance for those who pay on time. "This is a real victory for responsible borrowers who are struggling to stay current on their mortgages, but have seen the value of their homes decline through no fault of their own," Westwood Capital noted.
Westwood added that HASP offers a solid template for payment reduction - to reasonably affordable levels - on mortgage loans held by the GSEs and other government agencies (such as Fannie Mae, Freddie Mac, the Federal Housing Administration, Federal Home Loan Banks, etc), and those on the balance sheets of banks and other institutions over which the U.S. government now has influence.
The Plan's Drawbacks
Despite the upside potential to the just-announced program, it does not offer a "workable solution for the millions of home mortgages" that are backing private-label ABS. Westwood Capital thinks this might have been intentional, since many of the mortgages backing these deals required no verification of earnings or assets, while others did not have enough down payments and were too large to meet agency standards for borrowers with weak credit histories.
"Using government funds to help these homeowners is problematic, as it potentially equalizes support of less responsible borrowers, so this aspect is one that we both like and have concerns about," Westwood said. "It is important to note that the privately securitized loans are the very subprime, Alt-A, option ARM and Jumbo-prime mortgages that are the most vulnerable to default." More than $2.5 trillion (of nearly $11 trillion of mortgages outstanding at the peak of the bubble) fit into this category.
While the HASP provides for easy refinancing of many conforming loans controlled by the government or Troubled Asset Relief Program (TARP)-funded banks, the new program has only a loss matching and incentive formula to encourage payment reductions by servicers on non-government influenced loans. Westwood Capital thinks that providing for lender assumption of payment reductions down to 38% of monthly income, and the government sharing in half of any payment reduction down to 31% of borrower monthly income, will not be enough to overcome trustees' and servicers' wariness of private label mortgages. These firms have to assume the litigation risk from bondholders who object to the losses resulting from such modifications. Westwood also added that stipends provided to servicers are but "a drop in the bucket versus the potential legal risks." The plan's $5,000 maximum principal reduction in the case of successful modifications still leaves continuing borrowers open to re-default risk.
The HASP will not make GSE provided, low-interest refinancing available to any borrower whose existing mortgage debt without lender modification is more than 105% of the current value of their home.
According to Westwood, millions of homeowners, specifically borrowers with nonconforming loans, have seen the value of their homes fall far below this threshold. Housing values have already fallen by approximately 25% nationally, and by an excess of 40% in the most severely impacted markets.
Analysts forecast as much as an added 10% dip from present values. Borrowers under the most abusive loans will thus not be materially aided by the plan. "Still, it is important to note that many long-time homeowners who have not taken cash out when refinancing should have no trouble qualifying," Westwood said.
The new housing program was supplemented by the $787 billion stimulus bill signed into law on Presidents' Day by President Obama. The bill includes an $8,000 tax credit available for 2009 income taxes for first-time homebuyers of a primary residence if they buy a home by Nov. 30.
Bad Housing News
The government plan to deal with the housing market came after the release of very poor sector indicators. January housing starts fell a larger than expected 16.8% to a record low of 466,000. Partly contributing to the large drop was an upward revision to December housing starts to 560,000 from an originally reported 550,000. Consensus had been a projected decline to 530,000. Total housing starts fell to record lows in the Midwest, Northeast and South, while starts in the West were at a level last seen in 1966. Building permits also were at a record low annual rate of 521,000, a decline of 4.8% in January. This was also lower than the projected 530,000.
Homebuilder sentiment improved only to nine in February, from a record low of eight reported in January. The only component of the index that showed some noticeable improvement was the index gauging traffic of prospective buyers, which rose to 11 from eight. Meanwhile, the index measuring current sales increased just one point to seven and the index gauging sales expectations over the next six months fell to a record low of 15 from 17. National Association of Home Builders (NAHB) Chief Economist David Crowe said homebuilders were very concerned about the ongoing foreclosures and short sales which are "undermining home values." He attributed this to the drop in sales expectations over the next six months.
NAHB Chairman Joe Robson noted that the market for single-family homes remains very weak. However, "we are certainly hopeful that the newly passed economic stimulus bill, which includes some favorable elements for first-time homebuyers and small businesses, will have a positive impact that will help get housing and the economy back on track," he said.
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