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Negative Equity Still 800-Lb. Gorilla in Housing Market

Kathleen Pender at the SF Chronicle, one of the few national journalists to keep up with the government’s newly-tweaked HARP refinancing program, has a new story out claiming that the program is starting to “help the severely underwater.” The statistics she cites, rather than the anecdote, however, show the program isn’t really helping the severely underwater at all:

Last fall, the government said it would remove the 125 percent LTV (loan to value) cap and loosen other restrictions that had prevented many homeowners from refinancing under the original Harp. The expanded program, dubbed Harp 2, didn’t get into full swing until mid-March […]

On June 1, the Federal Housing Finance Agency reported that total Harp refinances had jumped to 180,185 in the first quarter of this year – almost double the number done in the previous quarter.

But they still accounted for only 15 percent of all Fannie and Freddie refis compared with 8 and 14 percent, respectively, the previous two quarters.

The vast majority of Harp refis in the first quarter were loans with LTV ratios in the 80 to 105 percent range. Guy Cecala, publisher of Inside Mortgage Finance, calls these loans the “low-hanging fruit lenders have been willing” to refinance.

Only 20 percent had LTVs between 105 and 125 percent and only 2 percent had LTVs greater than 125 percent.

Pender correctly qualifies this by saying that HARP 2 loans were only available for a couple weeks in the quarter. But we’re talking about 4,434 refinanced loans, total, in the whole country, over 125% LTV. And since that time, we’ve learned that several banks have simply cut off HARP loans about 105% LTV. And others, including the biggest banks like Chase and BofA, are refusing to refinance any underwater loans but the ones they already service, artificially limiting competition. This is being used to drive up interest rates for underwater borrowers on those loans. Pender claims there is some competition in the marketplace, particularly from Bank of the West.

Meanwhile, even a refinanced underwater loan leaves you with an underwater loan. Negative equity is the real problem here, leaving borrowers vulnerable to economic shocks and increasing the likelihood of foreclosure. It’s also damaging for the broader economy to have families carrying that much debt. But it may be a good thing for the housing statisticians. CoreLogic reports on a perverse scenario where this negative equity actually drives HIGHER home prices:

The national supply of unsold homes dropped to 6.5 months in April from nine months last June. But the decline occurred less because of an increase in sales. In fact, pending home sales dropped 5.5% in April, according to the National Association of Realtors.

Instead, fewer homes reached the market because the owners owe more on their mortgage than the home is worth and are trapped in negative equity, said CoreLogic Senior Economist Sam Khater in the report […]

“Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale,” Khater said.

In markets where more than half of borrowers are underwater, the average supply drops to 4.7 months, compared to 8.3 months in healthier areas.

As a result of the restricted supply, lower-priced homes in these areas are actually rebounding at their fastest pace since the homebuyer tax-credit “boom” in 2010, according to CoreLogic.

Somehow, I don’t think this is the housing boom anyone had in mind, with people locked to their homes, constraining supply artificially, and basically gouging new buyers (mostly investors, but some actual new homebuyers), who are getting an inflated product based on problems in the market. And without a serious effort at principal reduction, I don’t see a way out.

With the recognition of the need for debt write-offs, we see rethinking on all sides of the equation. One set of mortgage investors wants states to use eminent domain to condemn mortgages and allow the homeowners to stay. I talked to Jeff Merkley about an HOLC-type pilot program he wants for Oregon that would restructure your mortgage into two sets, with the first mortgage at or near market value and a slight haircut for the original mortgage holder. And there’s always just defaulting, which is becoming less of a taboo these days.

The point is that this trap of negative equity is such a squeeze, that it’s not sustainable as a status quo. And if this leads to more foreclosures, and the collapse of the remaining mortgage backed securities, the investors will finally have to say something about the mismanagement at all levels of this housing crisis.

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David Dayen

David Dayen

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