Spring is right around the corner in damp/foggy Portland, and since we last had over a foot of snow on the ground (Dec 2008), many things have changed with respect our national real estate quagmire in just 14 short months. The housing bubble and our debt/credit/financial crisis has brought about many interesting phenomena since we've experienced anything resembling knee deep snow in Stumptown:
Cash for clunkers
1st time home buyer tax credit
Unemployment benefit extensions for 2 years +
IOUs for 2009/2010 state tax refunds in California
Significant tax/fee increases being legislated nation wide
QE (US Treasury bond purchases by the Federal Reserve)
MBS purchases by the Federal Reserve to keep interest rates low
FHA insuring the overwhelming majority of US mortgages sold in 2009
Unlimited taxpayer federal funding legislated to Fannie Mae/Freddie Mac rather quietly on Christmas Eve 2009
Where am I going with all of this you may ask? Knee deep snow? HAMP?
As of yesterday, we have this new and interesting proposal for the entire US housing market straight from the Obama White House:
"Feb. 25 (Bloomberg) -- The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program."
There would be various consequences and outcomes for all stakeholders in real estate if the new proposal were to become federal law. Inquiring Portland Housing Blog minds should consider what the stakes would be for the following "typical homeowners" facing foreclosure under such a new federal law:
Homeowner #1 is no longer paying, but is doing so because they can simply no longer afford to pay. They don't want to leave, and they have every intention of paying the loan off in full. But hard times have struck them, and they have no real means of servicing most any loan on the asset, much less ever owning it outright.
Homeowner #2 is no longer paying, but is doing so because they've chosen not to pay. They have no intention of ever paying the original mortgage -even if they can afford it. They know they can rent or buy a similar house for much less than what they currently owe to the bank/Fannie/Freddie on a monthly basis. Houses around them sell for significantly less than what they paid and it just doesn't pencil out anymore. Life is short! They purchased with poor timing, and they now readily recognize it's economically silly for them to service a bubble era mortgage. This homeowner is happy to quietly "squat" in the house for as long as possible essentially for free, and then move on whenever the inevitable happens.
Homeowner #3 is no longer paying, and is doing so because they've chosen not to pay. But, this homeowner is not even living in the house. It's empty or rented at a cash flow negative monthly rate when compared to the mortgage. They just want the foreclosure transaction to be over with as soon as possible so they can figure out what it means for their income taxes.
Portland Oregon! You should find those three scenarios somewhat interesting, because yesterday's proposal from the Obama Administration would require HAMP to screen each and every one of those homeowners in foreclosure. All three examples provided above bring their own troubling yet telling questions to the housing market table:
Would homeowner #1 be allowed to stay and never leave? For what monthly payment? With what type of mortgage terms?
Will homeowner #2 get to stay for nothing? For how long paying zero monthly payments intentionally? Perhaps a HAMP form or two is filled out incompletely. They chose the old school paper based snail mail route for HAMP documentation. HAMP would be a huge, new, and inexperienced federal agency dealing with a growing wave of foreclosure volume. How long can homeowner #2 game the HAMP bureaucracy and live in that dwelling payment free?
Can homeowner #3 just get it over with and foreclose already? When? Are renters living there? What happens to them? Perhaps homeowner #3 can actually afford the mortgage based on recent and documented income streams and/or liquid assets? What will the new federal foreclosure screening law allow to happen or not happen in this particular case?
The most important and forward thinking question in my opinion, is what would such a federally mandated foreclosure law do to our housing market long term with respect to actual free market prices?
Certainly above all else it would require one very fundamental change for 100% of America's real estate market, and its legal ability to seek out a natural price point with respect to local wages. Historically, mortgages have been considered private party contracts litigated locally. Foreclosures, deeds, and titles are handled in the local county/township level circuit courts. In most cases, the local police force executes eviction notices. A new federal law requiring all foreclosures to be approved by a federal agency, could be an unprecedented shock to the famous NAR slogan "Every market is different”. It would also challenge the legal jurisdiction that local courts have with respect to private property rights and contract law between two private parties.
Speaking of the NAR, what would such a law mean for the average realtor out there? On one hand, lots of foreclosures executed quickly would result in plenty of fresh sales volume. On the other hand, foreclosures and wage/price parity would mean falling prices and lower commissions per unit. Which matters the most right now to the NAR and those who make profits in the marketing, selling, and financing of our Oregon homes: Higher home prices -or- the annual volume of transactions and average market churn rate? The answer of course is "both".
And now for a summarized conclusion of this very long winded and cabin fever induced weekend editorial so full of questions:
Perhaps the FIRE economy and the federal government are setting up housing markets for a long, slow, steady, and controlled burn when it comes to the price of owning property in America. We are all stakeholders in the land are we not? More foreclosures are coming and that's a certainty.
Which court jurisdictions will ultimately decide when or if foreclosure is allowed to happen?
County? State? Federal? Supreme?
Only time will tell...