Propping Up Housing

US Banker | November, 2009

Piecemeal efforts to turn around the housing market continue, but observers are unconvinced that the steps are enough to produce a true rebound in the near future. The Worker, Homeownership, and Business Assistance Act of 2009, signed earlier this month by President Barack Obama, provides three Band-Aids for the housing sector. The extension of unemployment benefits is a cushion against further foreclosures, for one. The extension and expansion of the homeowners tax credit breathes life into demand and provides some support for home prices. And the expansion of the provision allowing companies to retroactively apply net operating losses to profits earned in previous years will help sustain battered homebuilders.

While these measures are expected to continue coaxing a muted recovery or at least a stabilization out of the housing market, critics believe only a turnaround in employment can actually refuel home sales and prices. “In the end, we continue to stress that a sustainable housing recovery is only possible when employment improves and foreclosures subside,” notes the most recent Housing Monitor from CreditSights.

The Treasury Department keeps saying that its home modification plan “is on track” to help 3-4 million stressed homeowners within three years; it used those words again when releasing its October report last week. But even though Treasury boasted about the 650,994 trial modifications in place through the end of last month, very few of those trials have been converted into full-fledged modifications, sources say. Randy Johnson, real estate expert for Credit.com puts that number at 1,080 homeowners. He believes lenders are putting off modifications because “30 years is a long time—they think the housing market will recover in a few years, so why put themselves at a disadvantage?”

David Stiff, chief economist and vice president, quantitative research/
loan fulfillment solutions at Fiserv says “if banks and regulators want more loan modifications to be successful, it will be necessary to reduce principal balances for more borrowers.” Interest rate cuts and extensions of mortgage terms “will not be enough to make payments affordable for many delinquent mortgage borrowers,” says Stiff.