A recent article by Jann Swanson of the Mortgage News Daily reports on a troubling “tetrad of housing landmines” that could usher in a new wave of foreclosure activity. Pulling from a from Octavio Nuiry’s Housing Landmines: Are Mortgage Flare Ups Coming Soon?, Swanson reports that while foreclosure activity is waning nationwide, a new wave of foreclosures is forming on the horizon. The “tetrad” consists of: (1) defaults in loan modifications done under the Home Affordable Modification Program (HAMP); (2) Home Equity Line (HELOC) interest rate resets, and the huge backlog of remaining underwater borrowers and non-performing loans.
The first leg of the tetrad is the likelihood of mass defaults under HAMP. Sheila Bair, the former Chairwoman of the FDIC has commented that “HAMP was a program designed to look good in a press release, not to fix the housing market. I don’t think helping home owners was ever a priority for them [the Obama Administration].” Bair believed that the HAMP program was too rigid in its qualification requirements, claiming that the HAMP program was destine to fail because it was voluntary and that the banks would scuttle it. While the Obama administration promised that HAMP would help 9 million borrowers, by the end of July 2014, only 1.4 million borrowers had received a HAMP loan modification, and for those that did, 350,000 have since defaulted. Most damning of the inefficacy of HAMP is a comment Neil M. Barofsky, the former special inspector general of Troubled Asset Relief Program, received from former Treasury Secretary Tim Geithner. Barofsky said that Geithner told him that AMP was not designed to help distressed borrowers, but was implemented to help the banks ride out the foreclosure crisis. Geithner is reported as saying, “We estimate that they [the banks] can handle ten million foreclosures, over time. This program will help foam the runway for them.” HAMP indeed foamed the runway and stretched out the foreclosure process to allow banks time to recover. TARP originally earmarked $75 billion for HAMP modifications, but by July 2014, only $4 billion had actually been spent. Since its start, HAMP has rejected 5.5 million homeowners, and those that are actually in the program are about to see a nasty interest rate reset. Between 2014 and 2021, nearly 90 percent of the HAMP modifications will see a rate reset, including 300,000 in 2015. Sadly, as a government SIGTARP report states, “he longer a homeowner remains in HAMP, the more likely he or she is to re-default out of the program. Re-defaults of the oldest HAMP modifications are at a 46 percent re-default rate, a rate that continues to increase as the modifications age.”
The second leg of the tetrad is are the home equity lines of credit that are set to adjust soon. Nuiry, reports that as of December 2013, some 16 million U.S. consumers held $474 billion in HELOC debt that is still outstanding. Steve Chaouki, head of financial services at TransUnion has said that “Up to $79 billion of those HELOC balances could be at elevated risk of default in the next few years,” as consumers are forced to start paying both principal and interest on these HELOC loans. TransUnion estimates that 15% of the the $79 billion at risk of default could play out in the next year. What is more troubling is that over half of the $79 billion in troubled HELOC loans carry balances over $100,000. The Office of the Comptroller of the Currency estimates that approximately $30 billion in HELOCs will resent in2014. Reset balances will rise to $52 billion in 2015, $62 billion in 2016 and $68 billion in 2017. Brace yourselves for another default wave.
The third and fourth elements of “tetrad of housing landmines” are the fact that we still have over 1 million underwater borrowers and the continuation of non-performing loans nationwide. Nuiry’s report is a pretty hard-hitting indictment of HAMP and the banks, something very unexpected coming from RealtyTrac, which is a cheerleader for the mortgage industry. It remains to be seen just how the banks and our leaders will prepare for a festering new breed of foreclosure activity on the horizon.