(Image credit: Getty Images via @daylife)
With each passing month, the foreclosure crisis continues to slowly burn. The Obama Administration keeps splashing water on it---massive remodifications, mortgage settlement cash, rental programs---hoping something will stick. On Friday, here at the Clinton Global Initiative, in Chicago, HUD Secretary Shaun Donovan and FHA Commissioner Carol Galante announced yet another: a program to pool together mortgage loans on the brink of default, and save them.
In September, the FHA will begin its Distressed Asset Stabilization Program, which puts up thousands more loan notes for sale. Since 2010, the agency has sold off roughly 2,100 notes. By the fall, they plan to hand off around 5,000 a quarter. Private investors can then buy these pools, on the condition that they'll walk the owners through a remodification or short-sale. And homeowners, who are more than six months delinquent and have begun the foreclosure process, will suddenly find another option.
For underwater homeowners, "this will be another chance, another lifeline," said Donovan, at a presser on Friday.
The agencies have yet to specify where these loan pools will be, beyond the "communities hardest hit by the foreclosure crisis." Some of cities and investors may overlap with those targeted in the REO-to-rental program, currently being piloted in six cities, Donovan and Galante said. Although their reach in the shadow inventory is dwarfed by Fannie and Freddie, FHA backed loans are densely packed in cities, often making up a sizable share of the delinquent loans. Which means, if it works, the program could ease the foreclosure burdens in the highest FHA markets---Atlanta, Phoenix and Chicago.
The new initiative, Galante noted on Friday, would lower losses for the agency. But that depends on its execution, explained Dan Immergluck, from the Georgia Institute of Technology, in an email. "In order for this to happen," he said, "the FHA would have to book large losses on some of these loans, so that the investors would really modify them aggressively.
Yesterday, Galante told Bloomberg that some of these loan investors could become rental landlords, which essentially tucks them into the REO initiative. (As such, I'd expect the new loan pools to be ripe for securitization.) In tight rental cities, the rental pilot program is, as expected, taking flight. Its benefits, however, are mainly flowing to large investors.
If that continues under the new program, there's a chance it will only shift money around rather than suddenly resuscitate the housing market. "I am a bit concerned that in a fervor to reduce delinquency rates, the agency may be tempted to accept very low prices for the loans," Immergluck continued. "If it does that, and it doesn’t really succeed in keeping more folks in their homes, it will be a transfer of wealth to the loan buyers."
For Donovan, that outcome may be worth the risk. More than anything, this program looks like a roundabout way to keep advocating for widespread loan forgiveness for indebted homeowners---a proposal the Secretary has pushed for some time, against the reliable blockade of the FHFA and the GSEs. Friday's announcement, appropriately, came shortly after the naming of Fannnie Mae's newest chief, Timothy Mayopoulos, who promptly explained he would the hold company line and oppose principal reductions.
