Delaying The Housing Bottom By Saving Mortgages

The Office of the Comptroller of the Currency issues a quarterly report that shows the rate at which people with mortgage loan modifications default on those loans. The rate changes from period to period, but roughly 45% of homeowners with modified loans are more than 60 or more days past due within eight months of the change taking effect.

The Treasury Department says that it had reached one of the initial goals of it $75 billion program which should eventually help three to four million troubled homeowners. Five hundred thousand home loans have already been modified and that number was reached about a month ahead of the Administration’s timeline. The federal government has set this homeowner rescue package up so that lenders voluntarily lower the interest rate, and the government provides subsidies to those lenders.

Programs to help people make their mortgages more affordable should work like a charm. The process should also help the housing market reach a bottom by greatly reducing the number of people who are forced out of their homes. Deserted houses rarely fetch top dollar.

Peripatetic economist Nouriel Roubini recently said that home prices would fall another 10%, which will kill any recovery in the market that may be at the earliest stages of forming.

It may seem obvious, but housing cannot recover until it bottoms and actions that forestall that bottom for any length of time do not help homeowners of any significant period. If Roubini is right, someone who buys a home today and believes that housing is recovering will only suffer a large drop in the value of what is probably the person’s most valuable asset.

There may have been a time decades ago when a home was not an investment. People who bought homes they intended to live in them and pay off their mortgages over 30 years. The value of the home at the end of that period might be helpful as a source of retirement funds, but home prices were not moving up 10% year-over-year as they were in many regions from 2002 to 2006. Homes then changed from places that people live to investments on which people could make money. That even allowed people to borrow money against the appreciating asset.

The tide has turned completely against the home-as-equity decade and has come to a home-as-liability decade. This new period is a decade that may last longer than ten years.

The government’s desire to reset mortgage rates could arrest the fall in housing if everyone who took a modification honored it. That does not happen, so the supply of houses on the market continues to go up too quickly to help stabilize prices. The increase in joblessness adds another complication to the attempt to level home values.

If Roubini is right, people who might be in the market to buy a house now will remain inactive because of a fear that the home they are buying will quickly lose a part of its value. One of the reasons that mortgage modifications may not work is that people who own a home that is worth only 60% or 70% of the total value of that home loans are more tempted to walk away than people who believe that their home will have substantial equity value when it comes time to sell it.

It may be counterintuitive, but for home prices to recover quickly, they need to hit bottom as quickly as possible. When the day comes that the population of potential buyers believes that they are getting bargains that have not been available in generations, they will start to stream back into the market. Then, and only then, will home prices start back up.
The idea of destroying a market to rebuild it is anathema to most people. Housing should recover on its own. Every homeowner who is worthy of owning a house because they have worked hard and done his best to keep his obligation to his lender, should have an opportunity for help from the government. Unfortunately, the statistics argue that many of those people do not keep their obligations, no matter what the reason. That helps keep up the slow bleeding in housing prices that undermines any wide spread intervention to solve the problem.

Housing almost certainly has not bottomed, to some extent because it is not being allowed to.

Douglas A. McIntyre