The Treasury and Housing and Urban Development (HUD) announced new programs on Wednesday seeking to curb foreclosures caused by unemployment. Ever since the jobless rate began to soar, the housing market's problems could no longer just be blamed on subprime mortgages. Prime borrowers were laid off, leading to many defaults. These programs add another chapter to the government's scattershot approach to curb foreclosures. They also raise a lot of questions.
But before getting into those issues, here's a brief description of each program.
This accounts for $2 billion of the funding. It is a part of the "Hardest Hit" initiative, which targets the ten states that need aid most. The states decide how to implement their unemployment assistance programs for homeowners based on what they believe will work best for their individual situations, with some rough guidelines (.pdf) provided by the Treasury.
The HUD Program
This $1 billion initiative arose from the Dodd-Frank financial regulation bill. Consequently, it has a little bit more specific instruction, but it also isn't as fully formed as the Treasury's program, since HUD is still working out implementation logistics. It would provide unemployed Americans a no-interest, non-recourse, subordinate bridge loans of up to $50,000 to help pay mortgage principal, interest, mortgage and hazard insurance, and taxes for up to 24 months.
Now, let's dig in to each of these programs.
Issues for Both Programs
There's no question that foreclosure among unemployed Americans is a problem. But it's less clear that there's a good solution. Fist of all, how do you determine that someone who was laid off will find a job in the short-term (one to two years) that will provide a similar income level as before? You can't. How do you prevent a homeowner from essentially living for free for two years, after which time he or she intends to strategically default anyway? You can't. How do you fairly choose only tens of thousands of homeowners out of the millions of unemployed homeowners who might deserve this assistance? You can't. The list goes on, as programs like this are great theory, but really hard to make effective in the real world.
One could argue that programs like these will help to keep unemployment higher for longer. Those who hold an extreme view that the government makes things worse anytime it intervenes in the market believe that unemployment benefits result in the jobless being picky about their job prospects, rather than getting back to work more quickly. But even a more moderate stance might lead to questioning additional assistance to help pay mortgages. Remember, these people already have their unemployment payments extended -- but now they get additional money to help pay more of their bills. While some government assistance might be warranted to keep the basic needs of unemployed Americans satisfied, at some point you have to ask how much is too much. The government should make unemployment a livable condition, not pleasant one.
The programs will also prevent labor mobility. If these homeowners were to foreclose sooner, then they might seek employment elsewhere, in less-depressed local job markerts. These programs are targeted at the "hardest hit" economies, but could sustain their troubles.
But let's say that the programs can be implemented fairly and effectively -- then what took so long? The program won't begin until this fall. The national unemployment will have been above 9% for at least 17 months by then. And prime borrowers foreclosing due to unemployment have also been the bigger problem in the housing market for at least that long.
Now onto some specifics:
Let's start with the allocation. Here's the chart, to which I've added a few additional columns and sorted by the amount of aid allocated per unemployed resident:
According to the Treasury, the chosen states were based on unemployment severity and the allocation was based on population size. As you can see, these aren't necessarily the most effective measures. Case-in-point: Nevada. It has the highest unemployment rate and highest foreclosure concentration, but the lowest funding per unemployed resident. Another strange example is Mississippi. It has fourth-highest aid per resident, but ranks 47th in foreclosure concentration, implying that foreclosures there aren't much of a threat. Another odd oversight was Arizona. It's entirely left out. In July, it was tied with New Jersey at 9.6% unemployment, and has the third highest concentration of foreclosures. Why not base allocation on the number of unemployed and create a weighting for foreclosure severity?
Because so much is dependent on how states choose to implement the program, the Treasury offers no estimate of how many borrowers it intends to help. It sure is convenient that it's impossible to measure the success of the program since no expectations have been set. Is 50,000 borrowers helped impressive? How about 500,000 or 5,000,000? There's no target by which to judge performance.
The program may also fail to help the most vulnerable or deserving. Unlike the HUD program, the Treasury's doesn't limit the size of the loan. Instead, it limits the size of the mortgage -- to the GSE conforming limit of $729,750. I don't know about you, but I wouldn't appreciate my taxpayer dollars going towards saving an $800,000 home (with a $700,000 mortgage) from foreclosure, even if the owner is unemployed. You could probably prevent the foreclosures of three $250,000 homes for the price it would cost to save that one. It also doesn't help that there's no clear definition of hardship provided by the Treasury.
Unlike the Treasury program, HUD is a little more specific about eligibility requirements. Participants must:
1) Be at least three months delinquent in their payments and have a reasonable likelihood of being able to resume repayment of their mortgage payments and related housing expenses within two years;
2) Have a mortgage property that is the principal residence of the borrower, and eligible borrowers may not own a second home;
3) Demonstrate a good payment record prior to the event that produced the reduction of income.
The first point is a little bit concerning. Why should delinquency matter? Imagine a situation where you have two unemployed homeowners with identical underwater mortgages and savings. One does not feel he should spend his precious savings on a house that is worth less than his mortgage balance, so he's delinquent and preparing to strategically default. The other believes he should live up to his obligations and has been depleting his savings to stay current on his payments. Why is the first guy eligible for the program, but not the second?
Another troubling aspect of the program is that the "loan." This essentially creates negative amortization, increasing the borrower's total debt. Only a small fraction of the loan will be principal paid down on the mortgage, while the rest will be interest, insurance, and taxes -- which will add to his or her aggregate debt. In other words, in order to be able to pay the new debt load, a person will have to get a job paying greater income than they had before their job loss. That result isn't very common.
But perhaps this worry is misguided. After all, the loan is also "non-recourse," which means it probably isn't much of a loan at all, but a gift. If you got the maximum limit of $50,000, why pay back Uncle Sam? The government won't come after you, and that's an awful lot of money to owe. It might ding your credit a bit, but will defaulting on the loan really do $50,000 worth of damage to your credit? Probably not. You can expect the government to incur pretty big losses on this program. Many people will simply not pay back their loans, and others might not be able to since their debt burden is higher or they ultimately foreclose anyway.
Unfortunately, this may be the last you hear of these programs being covered on a national basis. This is one of those government efforts that quickly fades from most journalists' minds. Because the programs will be administered on a state-by-state basis, they won't receive much national coverage. The local reporters will also probably find it hard to evaluate the programs -- since all states all have different amounts of funding and will distribute it in different ways, there's no great means for comparison. And since the Treasury has set no aggregate targets, even if it decides to report the progress, we won't know if we should be impressed or not. It's another $3 billion spent, and taxpayers can really do is shrug.