Underwater mortgages cause defaults - not unemployment
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According to the Congressional Oversight Committee (COP), unemployment is presently driving a fifth wave of foreclosures, but analysts at Amherst Securities say that negative equity is far more predictive of home loan defaults than unemployment. The question is critical, because the policy response depends on the answer: if coming defaults are caused by unemployment, then the relevant response would be to subsidize mortgage payments, says Laurie Goodman, head analyst on the team. On the other hand, if negative equity triggers defaults, then principal reduction must receive a higher priority.
Goodman presents two pieces of evidence to make her point. The first is a matter of timing: default transition rates picked up long before unemployment; and the second a matrix of transition rates. The latter led to three conclusions: One, even in the lowest unemployment column, high debt to asset ratios are associated with markedly higher default transition rates. Two, when borrowers have positive equity, unemployment plays a negligible role. Three, unemployment does impact borrowers with substantial negative equity, but far less than does high debt to asset ratios. Carrying the analysis a step further, Amherst broke the data into owner-occupied and non-owner-occupied (investor and second home) categories. The same patterns emerged. Even for owner-occupied houses, unemployment only has a large impact where debt to asset ratios > 120%. For borrowers with very negative equity, unemployment is a catalyst that can kick defaults up, but it’s not a cause.
Will the Homebuyer credit be extended?
Senate Democrats are close to compromising on a provision that would extend the first-time homebuyer tax credit, according to Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev.. In fact, the Senate will extend the $8000 tax credit for first-time homebuyers until April 2010, with a separate $6,500 credit for second home purchases. Legislation creating the extension could be included in a bill that will extend unemployment benefits and could go to debate as early as this week, according to numerous media reports. What we don’t yet know are the terms of the extension.
Some reports indicate the extension would run through June 2010 and expanded to include all homebuyers, not just first-time purchasers, and others that would extend the full credit to first-time buyers until April 1, with $2,000 reductions every quarter until it dissolved at the end of 2010. The National Association of Realtors (NAR) and National Association of Home Builders (NAHB), along with the Mortgage Bankers Association (MBA) continue to lobby federal officials to extend the credit. According to the latest Department of Housing and Urban Development (HUD) and Census Bureau data, the rate of new home sales declined 3.6% in September, and some have speculated the impending expiration of the credit is contributing to the decline.
IRS gives Homebuyer Tax Credit to aliens and minors
Ok, we knew it would happen, right? We all love the tax credit – if only the government didn’t have to be the one administering it. The Treasury Inspector General for Tax Administration (TIGTA) believes the Internal Revenue Service (IRS) may have paid out millions of dollars in first-time homebuyer tax credits to individuals not eligible to receive the $8,000 credit. Nearly $4 million of incorrectly paid credits were due to both alleged fraud and filing errors on claims by 580 taxpayers less than 18 years old. The youngest of these was 4 years old, TIGTA head J. Russell George said in prepared testimony to the House Ways and Means Oversight subcommittee. TIGTA also found 3,200 taxpayers with Individual Taxpayer Identification Numbers (ITIN) claiming the credits. ITINs are used to track income tax for resident aliens, in lieu of a social security number, and it’s possible that as much as $20.8 million in tax credits was paid to resident aliens ineligible for the credit. As of August 22, 2009, more than 1.4 million taxpayers claimed the tax credit for homes purchased in 2008 and 2009, representing total foregone tax revenue of about $10 billion, according to estimates presented by Government Accountability Office (GAO) director of strategic issues James White.
Obama programs hurting recovery, helping banks
Blackrock Inc. Chairman Laurence Fink claims that Obama administration programs to help homeowners stave off foreclosure may hinder the recovery of the mortgage market while benefiting banks that own second loans on the properties. Fink said policies introduced this year to reduce foreclosures are flawed because they don’t require home-equity loans to be wiped out before the mortgage is modified. Instead, in a break with the intentions of contracts, he says the second loan’s terms may also be revised, spreading the financial loss among lenders. Fink is the highest-profile investor to call attention to potential conflicts when banks that service mortgages handle loan modifications. One concern is that many servicers, which handle billing and collection for mortgage owners, also hold home-equity loans that would lose all value in a foreclosure. JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co and Citigroup Inc, the four largest servicers, own almost $450 billion
of home-equity loans, according to Laurie Goodman, an analyst at Amherst Securities Group in New York.
Home sales to rise?
According to projections from residential mortgage insurance and credit enhancement product provider The PMI Group (PMI), national homes sales are expected to rise 10% year-over-year basis during the Q409, but the sharp drop in sales earlier in 2009 will keep yearly sales on par with ‘08 levels. The report projects that the oversupply of housing inventory will drop median housing prices 12.5% by the end of 2009, but that a boost in the second half of 2010 not only stabilize prices but increase sales of existing homes by 9.4% and new home sales by 21.6%. PMI anticipates that Federal Reserve policies will remain constant and short-term interest rates should remain close to current levels, although long-term rates will “edge upward” next year. According to the report, “ultimately, both long- and short-term rates will rise substantially once the Fed begins to tighten in earnest – with the yield curve beginning to flatten at that time.” The report also projects a 33% increase over last year in mortgage originations by the end of 2009. As purchase mortgages decrease 6.1%, there will be a projected increase in the share refinance mortgages to 66% of all mortgages originated in the year, but that will shift in 2010. PMI projects that origination will decline by 22%, but purchase activity will take a 15% greater share of the market, and the refinance share will drop to 50%.
