February 12, 2008
Why "Project Lifeline" is unlikely to help the mortgage mess.
MarketWatch reports today:
In the latest move aimed at halting a swelling and steady flow of mortgage foreclosures, six of the nation's largest mortgage lenders bowed to government pressure and joined forces Tuesday to give all homeowners who are seriously delinquent on their loans another chance.
The lenders have agreed to freeze foreclosures for a month to give borrowers and lenders time to work out a repayment plan.
Named Project Lifeline, the initiative is a step-by-step approach for homeowners who are 90 days or more behind in their mortgage payments, a circumstance that already puts them in serious risk of losing their homes. These borrowers-- many of whom have not contacted their lender-- could begin receiving letters from them as soon as this week.
The program is not a solution to the housing crisis but is considered a "pause" in the foreclosure process, giving homeowners an extra 30 days to work out a payment or modification program.
The premise seems to be that foreclosure must be contrary to the best interests of either the borrower or the lender, or perhaps that it is against the best interests of both. To the extent that many borrowers did not understand all the details of the loans they took out, such as the reset after the introductory teaser rate, one could certainly make a case for that interpretation.
But foreclosures are burgeoning even when teaser rates remain in effect. And a new research paper by Federal Reserve Bank of Boston economists Kristopher Gerardi, Adam Hale Shapiro, and Paul S. Willen suggests that defaulting borrowers may be perfectly rational. Their paper (which has also been discussed by Richard Green, Mark Thoma, and Arnold Kling) concludes that foreclosures result not from reset shock or income surprises, but rather are a rational response of the borrower when the value of the house falls below the value of the mortgage debt. The authors write:
house price appreciation plays a dominant role in generating foreclosures: homeowners who have suffered a 20 percent or greater fall in house prices are about fourteen times more likely to default on a mortgage compared to homeowners who have enjoyed a 20 percent increase. We attribute most of the dramatic rise in foreclosures in 2006 and 2007 in Massachusetts to the decline in house prices that began in the summer of 2005. Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages.
To the extent that analysis is correct, a "pause" in the foreclosure process will be helpful only if house prices are finished falling. But house prices decline sluggishly in response to market pressure, given the unwillingness of many sellers to acknowledge the magnitude of their capital loss. Even if the number of homes sold were to rebound tomorrow, there would remain a large inventory of unsold homes that will continue to push prices down.
Those currently in default on mortgage loans may well be behaving rationally. Whether the same can be said for someone who believes that real estate prices will fall no further is another question.
Posted by James Hamilton at February 12, 2008 05:33 PMdigg this | reddit
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I have long been irritated by the incessant sound of violins in the background when many (politicians, especially) talk about US Foreclosures. There are far too many people who feel the defaulters are poor-but-honest Dickensian characters, ruthlessly e... [Read More]
Tracked on February 12, 2008 07:06 PM
"The only policy tool we have available is the stimulation of asset inflation."
This is the position of the central bank of a failed state.
This is the position of the central bank of the United States of America and of its Department of the Treasury.
Posted by: esb at February 13, 2008 01:43 AM
Paper Money 101
Posted by: Bill at February 13, 2008 06:32 AM
"The only policy tool we have available is the stimulation of asset inflation."
esb, that may not be the "only" tool but it certainly is the intended tool from a CB that uses the "financial accelerator" model to drive economic activity.
Only problem, driving balance sheet expansions only works if you're driving the productive side of the economy. Financially accelerate the consumption/household side and you have the recipe for financial armageddon. Which in todays world equals housing debt deflation post ponzi subprime mortgage scheme.
Can the FED reflate another consumption scheme? Should it?
Posted by: groucho at February 13, 2008 07:21 AM
There just aren't many things right with this program, especially the decision to freeze foreclosures for 30 days. Anyone who has worked with a lender knows that it takes them 14 of those days to confirm getting a fax full of homeowners' financial information. Then it takes another 30 days after that for them even to get around to making a decision about a repayment plan or modification.
The government and banks are also pushing off the responsibility on the homeowners. The banks are stating that they will proactively call homeowners to offer these programs, but homeowners in foreclosure are deluged with dozens of calls every day from the collections department. Few of them continue taking the calls after a while. Throw in one or two calls from the loss mitigation department to offer "help," and the owners will never even be aware of the program.
But then the banks and government can say they did their part, when in fact they've done everything possible to prevent more people from saving their homes or getting into affordable homes. But big loans on expensive homes = higher interest payments per month and higher ad valorum taxes.
Posted by: foreclosurefish at February 13, 2008 02:47 PM
Is there some source where we can see the latest foreclosure rates, historic rates, and maybe rates by state or region? I'm aware of a few sources, but they seem to require subscriptions or fees. For all the discussion of the "crisis" I'm having a heck of a time finding much more than, "foreclosure rates in XX city are up XX percent," but not historic rates, not actual rates, nothing for comparison, and nothing that gives information on broader markets.
Posted by: Michael at February 13, 2008 04:45 PM
If this is correct, it is rational for the lenders to forgive a share of the mortgage debt. Lenders will lose some of the lost equity anyway, and they will save transactions costs by renegotiating the balance of the loan. It baffles me that the whole discussion focuses only on interest rates.
Posted by: mike at February 13, 2008 05:40 PM
Michael, Calculated Risk often reports such information.
Posted by: JDH at February 14, 2008 08:19 AM
I feel like this "project lifeline " isn't a life line at all it is just postponing what is bond to happen with a door way of thirty days , I have been dealing with Hud & fha since August of 2007 and it is Febuary 2008 and I am just now getting action and the help our family needed it is to little time to complete everything that they request .
Posted by: April Cook at February 17, 2008 10:10 AM
Responding to �foreclosurefish�, there are actually no free sources of foreclosure statistics. Although the federal government requires the reporting of all sorts of arcane information, such as the number of Aleutian Islanders in management positions, it does not collect foreclosure information. Each county collects (or fails to collect) its own statistics. Companies such as RealtyTrac try to compile the numbers, but it has to be a daunting task. There are 3,141 counties in the U.S. and any organization trying to collect foreclosure information needs to contact them all. The Mortgage Bankers Associations collects mortgage information from its members. If you want to purchase one of its reports, be prepared to pay $500 or more.
Posted by: foreclosed dreams at February 17, 2008 05:12 PM
In 2005 I was seeking a loan, my husband had been terminated from hiss job. My husband was unemployed and I am disabled without an income. But none the less I was given a loan to pay off credit cards. Again I remind you we had no income. The interest rate is 10.5 and the payment is $1093.00. I do not know how I thought we were going to pay this back. I wonder how the lender thought we were. My husband won his case and was reinstated with backpay and all benifits retroactive which we have seen none of. He has a pending lawsuit for the unbelievable hardship we went through during this time. Meanwhile we have fallen behind on our payments. We do not know what to do.
Posted by: Mary Armijo at February 28, 2008 11:40 PM