The Making Home Affordable (MHA) plan -- which consists of both refinance and modification efforts -- was designed by Washington to help millions of troubled mortgage borrowers avoid foreclosure and keep their homes. One of the loan modification strategies under the Home Affordable Modification Program (HAMP) involves reducing the mortgage rates of qualifying borrowers to as little as 2%.
But in a world where the phrase "unintended consequences" makes its way into at least one headline per day, imagine what might having millions of households paying 2% on their mortgages do to real estate markets.
Sticking with Starter Homes
The move-up buyer may evaporate for the five years that most modifications are in force. Consider that in the pre-HAMP world, a couple in a two-bedroom, $100,000 home might naturally look at three-bedroom, $150,000 homes as soon as their incomes increased and they started a family. If they exchanged yesterday's $90,000 loan at 6% for today's $135,000 loan at 5%, the payment would increase from $539 to $725. But if they had a modified payment at a 2% rate on the $90,000 loan, they'd be paying $333, or even $273 if they got a 40-year amortization. Not too many people would be willing to suck up a 300% payment increase to get a slightly bigger house. Which leads to...
Home Improvement Makes a Comeback
Homeowners with nice low modified payments who want to upgrade their premises could turn to home improvements to accomplish their goals. But they shouldn't count on getting a home improvement loan from a mortgage lender--they would probably turn to sweat equity or cash.
Companies Find Employees Less Inclined to Move
Studies show that employees are far less willing to move at their employers' requests today because they don't want to take losses on their homes. Add in the fact that they might find themselves exchanging 2% modified mortgages for 5% loans (if they can even get them -- many borrowers' credit scores have taken a hit because of their loan mod), and you end up with very immobile workers. In fact, this decline in workforce mobility may exacerbate unemployment in some areas. According to the UK's Centre for Economic Policy Research, insufficient geographical labor mobility appears to indirectly relate to persistently high unemployment in economies.
Inventory Dries Up
Thanks to the combined effects of HAMP, foreclosure moratoriums and mortgage lenders holding back real-estate owned (REO) properties for sale (rather than dumping them into the market and further depressing home prices), foreclosures have begun slowing, and first-time homebuyers are already facing stiff competition from investors with cash to close, reports the Washington Post. "One of the key questions is the timing, and a lot of the timing issues are really related to the administration's HAMP program," Sam Khater, a senior economist for mortgage research firm First American CoreLogic, told the Los Angeles Times. "If many of the loans that are delinquent are able to be successfully modified, and those loans perform, then that should alleviate this issue of the pending supply and shadow inventory."
In a 2% mortgage world, properties with modified loans attached to them will be off the market. This means fewer homes for sale and more competition. According to James Hagerty at the Wall Street Journal, this is already apparent as modifications slow the foreclosure process and the flow of property into real estate markets. Home prices are possibly being supported by this process.
Okay, Now the Reality
The fact is, MHA has helped only a small fraction of those it set out to. There are not 4 million happy homeowners with 2% modified mortgages. Of the 1.3 million "trial" modifications started under HAMP since February 2009, only 116,000 have been converted to permanent loan mods, says the Philadelphia Inquirer. Analysts claim that only about half of all trial loan modifications will eventually become permanent, and of those that do, another 50% will eventually end up in default. So the 1.3 million trial loan modifications may translate to just 325,000 homes with permanently modified mortgages, or less than one half of 1% of the 75.6 million owner-occupied houses in the U.S.
Ultimately, it's the unemployment rate, the economy and the foreclosure crisis that will drive housing markets -- not the well-intentioned but thus-far meager results of HAMP.
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Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.