As we ponder the many ways we can improve ourselves in this new year, I thought I’d write out three resolutions that the government can carry out to overhaul the moribund real estate industry in 2012.
First, let’s hope the Obama administration, Congress and the regulators resolve to consolidate all existing aid programs into one uniform mega-program with uniform eligibility requirements, application forms and documentation requirements. Such uniformity would provide some clarity where there is now chaos and would perhaps begin the long process of re-establishing a market equilibrium.
The current and previous administration’s alphabet endeavors brought us the largely unsuccessful TARP, HARP, HAMP and HAFA programs. Despite their good intentions, these programs all focused on a carrot-and-stick approach. The “carrot” was that homeowners might be able to avoid losing their homes to foreclosure. The “stick” was that their credit would be damaged for many years and they might wind up owing the Internal Revenue Service thousands of dollars on phantom income reported by the lenders forgiving bad debt.
These programs all essentially failed to accomplish their stated objectives because they relied on one flawed assumption: that by throwing taxpayer money at the existing lenders, bankers and quasi-governmental agencies that got us in the mess in the first place, they would voluntarily use their best efforts to extricate us from the real estate morass. This has proved to be a fatally flawed assumption.
What we have now is a patchwork of inconsistent and largely theoretical governmental programs with precious few practical success stories.
For example, under Home Affordable Refinance Program (HARP), borrowers are required to be current in their mortgage when they apply, with no late payments during the prior six months and no more than one late payment during the prior 12 months in order to be eligible for assistance. Conversely, under Home Affordable Modification Program (HAMP), a borrower must be delinquent in his mortgage payment or be in imminent danger of becoming delinquent in his payments.
Further complicating these eligibility requirements is the largely arbitrary loan to value ratios (LTVs). LTVs are the amount owed versus the home’s fair market value. This is not to say that LTVs are not a critical factor in underwriting loans, refinances or modifications; it’s just that the fair market value can vary considerably during the refinance or modification process using government program.
Borrowers seeking help from these programs are now waiting nine to 12 months or longer for the lender’s decision. Until recently, borrowers who owed more than 115 percent of their home’s fair market value were unable to obtain any benefit from these programs. Only recently were these loan to value ratios relaxed, which allowed many more real world borrowers to start to take advantage of the HAMP modification and HARP refinance programs.
My second resolution would be for Fannie Mae, Freddie Mac and the nation’s other holders of real estate owned (REO) to resolve to dispose of that vast real estate portfolio in a prompt, orderly and efficient manner. Adopting and rigorously following some simple guidelines would go a long way to resolving our real estate stalemate.