Eric Hovde penned a piece this weekend that deserves a close read, especially if you happen to be a U.S. Senator — and I know that more than a few now read HW each week. His point is one that our editorial team has been hammering since at least August of last year: that housing prices simply must fall, and a good chunk of homeowners must lose their homes. Attempting to fight the forces of housing gravity now at work isn’t likely to end well. To wit:
… if homeowners are able to reset their mortgage balance to their home’s current fair market value, less a 10%-15% discount, the real probability exists that borrowers who have the ability to pay their existing mortgage will manipulate the system to receive a similar benefit. Ask yourself this simple question: If your neighbor is able to stay in their home and also receive a meaningful reduction in their mortgage principal balance, would you not want the same result? The obvious risk is that a significant, further wave of homeowners — who are already on the brink — stop making their mortgage payments … The banking industry today is not in a position to assume the massive write-downs called for by these proposals…. the proposals place an enormous burden on the FHA, one which it is not capable of handling.
Back in August of last year, when PIMCO’s Bill Gross was crying to Congress for a bailout package, we first noted the fact that all of the Congressional “help” in the world can’t solve for all of the key factors now making key housing markets nationwide: oversupply, unaffordability relative to personal income, a dramatic shift in underwriting standards, and a rising tide of foreclosures. Here’s what I had to say then:
Imagine if Johnny Subprime sees his $500,000 2/28 ARM forgiven and replaced with a $400,000 30-year fixed mortgage … Now, multiply that effect by at least two million. You explain to me how the other homes in those neighborhoods continue to justify their $500,000 mortgages after that one. By bailing out those who can least afford their mortgages, we essentially reduce home prices to their lowest common denominator — that is, to whatever price a troubled subprime borrower can bear. And that price will by its very definition be much lower than the price that the rest of the market — that is, the majority of borrowers who can afford their mortgages — would otherwise settle on.
That’s assuming of course, that the housing bill will make enough of a dent with troubled borrowers to impact the overall housing market — we’re now staring at 3 million or so foreclosures this year, and many more troubled borrowers beyond that total. The Senate housing bill is estimated by the Congressional Budget Office to aid just 400,000 at-risk borrowers. I’d submit that’s going to end up creating a perceived shortfall in much the same way that expanding conforming lending limits has. Which is to say that even if the current controversial housing bill passes and becomes law, it’s highly likely that Congressional Democrats will be going back to the well to hammer out yet another housing aid package — and that next bill will be even larger than the one currently under consideration, if past experience with Congressional response is any indication.
