The Department of Housing and Urban Development launched a new program today—the Emergency Homeowner’s Lending Fund—that aims to spend $1 billion trying to help homeowners that have lost their jobs are are unable to pay their mortgages. The continued dedication to spending instead of cutting issue set aside, on its face this sounds like a nice program. HUD is trying to help families and also help banks avoid more mortgage losses at the same time.
But the way I see it HUD is hampering the housing recovery process (which hurts everyone), they are perpetuating the unemployment problem (also bad for the economy), and they are continuing to bailout the financial system (which will continue to see itself as TBTF without a serious shift in Washington policy towards Wall Street).
So how is HUD unintentionally hurting families while trying to help them?
Lets look at the program to start. The money was dropped into the Dodd-Frank bill passed last year since attempts to finance the program on its own were failing in Congress. I would challenge that the program is nongermane to addressing regulatory failure in the financial system—supposedly the goal of Dodd-Frank—but that isn’t entirely relevant at this point. What is relevant is that a similar program already exists within Treasury.
In February 2010, the Treasury Department launched its “Innovation Fund for Hardest Hit Housing Markets” that has provided $7.6 billion of TARP money (originally intended to bailout banks) to finance housing relief programs on the state level. The Hardest Hit Fund was expanded three times between February and August 2010 to eventually include 18 states (including DC). States applied for and received grants that allowed them to “develop creative, effective approaches that consider local conditions.” Examples include, mortgage modifications, short sales programs, principal reduction programs, and second lien reductions.
HUD’s Emergency Homeowner’s Lending Fund is intended to help provide mortgage payment relief to eligible homeowners in the other states, plus Puerto Rico.
Program applicants will be qualified for the program if they were under a specific income threshold and have experienced a “drop in income of at least 15% directly resulting from involuntary unemployment or underemployment due to adverse economic conditions and/or a medical emergency.” The income limit is the larger of $75,000 or 120% of area median income (which can be as much as $150,000 for a four-person household). You have to have missed at least three mortgage payments and been notified by your bank of intention to foreclose. And you have to demonstrate that you’ll be able to handle the payments on your own in the next two years (presumably once you find a job).
Basically, if you make less than the income cap, have lost your job or can only find low paying part-time work, can’t pay the mortgage on the house you live in, but demonstrate ability to resume payment, then you have free cash coming your direction from the state program being set up, courtesy of the U.S. taxpayer. Given that the median income in the U.S. roughly $50,000 a year, and that there are millions missing mortgage payments, this is quite a broad reaching, generous program.
But will it help Americans?
In the near-term, it might enable some people who are struggling to make payments to stay in their current homes. But is that actually helping them. Lets return to the three main things wrong with this program to see how HUD is really going to hurt those same homeowners they are trying to help.
(1) First, this program that will allow families to delay foreclosure will hamper the housing recovery process. The ELH Program is just another delay for delinquent mortgages to work through the system. The White House tried to spend $50 billion with the Home Affordable Modification Program (HAMP) and that utterly failed. Not only has the White House been unable to spend all the money they wanted to, but a majority of those who had their mortgages modified wound up slipping back into delinquency anyway. This delayed when homes hit the real estate market as owned by a bank and distorted housing price signals that depend on knowledge of available supply.
Put another way, if the home is going to hit the market anyway, slowing it down means the market thinks there are only so many homes available and sets a price for each house. But the more homes there are on the market, the less home prices will say stable and the more likely they will fall, meaning a delay in the foreclosure process causes people to overpay for their homes. (See more on this by reviewing our blog posts and articles on the shadow inventory.)
(2) Second, this program actually makes unemployment worse and economic growth less viable. A key part of the qualification is the “ability to resume payment” that rests on the assumption state housing program staff can adequately predict if employment opportunities are strong for the household in the coming two years. I don’t think they will put much effort into this, but set that aside for the moment. Consider this: to qualify you have to have been at least three months delinquent and gotten notice of foreclosure. So at minimum the household bacon fetcher has been out of work for 12 weeks. We can assume that each family has some savings, but to be cautious we’ll assume only enough savings to make one mortgage payment after getting a pink slip. So the household has likely been unemployed for at least 16 weeks at minimum to qualify for this program.
So we have people at least 16 weeks unemployed that have to demonstrate they can get a job and start making payments on the mortgage again. But the problem is that 59.6% of the unemployed in America have been without a job for 15 weeks or more. The trend we’ve seen in the past few years is that it is harder for the long-term unemployed to get work than the short-term unemployed. So if the household has not gotten a job within four months of becoming unemployed it might be that employment opportunities would be better elsewhere.
Thus, in effect, this housing Lending Fund will help create an incentive for families to stay put in a home they can’t afford in an area they can’t find a job for as much as two more years beyond their unemployment duration at the start of the program. This means longer unemployment problems. It also means we are keeping productive workers from creating economic value by moving somewhere where their abilities can help to grow a company or provide a service. That hurts economic growth.
(3) And third, this Emergency Homeowner Lending Fund is also a continued bailout to the financial system. If the mortgages can’t be paid then that means losses for banks and mortgage investors as the delinquencies pile up. This program fund will bailout the financial system from feeling those losses. And if there is anything that Congress and the administration should be avoiding is adding any more fuel to the fire of too big to fail presumption.
P.s. On the second point listed above, we could assume the standard households eligible for this program are unemployed even long than 16 weeks given how much time its taking banks to issue foreclosure notices and the fact that many people are going as much as two years before banks take action, but we’ll give HUD the benefit of the doubt on that too. However, given that 14.4% of the unemployed are between 15 and 26 weeks unemployed, while 45.1% of the unemployed are 27 weeks or longer, the standard family would have to find work within just two months of starting the program (also assuming they get qualified right when they hit the three month delinquent mark, which is also generous) before slipping into the later category where it is the hardest to find work.
All numbers are as of May 2011 releases by the Bureau of Labor Statistics.