The Broader Market

By John Griffith and Jordan Eizenga

More than five years into what is arguably the worst foreclosure crisis in American history, millions of families are still at serious risk of losing their homes. Nearly one in four homeowners is “underwater,” meaning they owe more on their mortgage than their home is worth, and more than 7 million homes are still in the foreclosure pipeline, according to analysis from Morgan Stanley. In fact, some analysts predict we’re only halfway through the crisis.

The big question before lenders, investors, and policymakers today is how to avoid another wave of costly and economy-crushing foreclosures. There are several ways to lower an at-risk borrower’s monthly payments and increase the chance of repayment: refinancing to today’s historically low interest rates, extending the loan’s terms, modifying the interest rate, deferring payments, or lowering the amount the borrower actually owes on the loan—so-called “principal reduction.” In most cases the lender or mortgage investor responsible for the loan considers all of these options when deciding which intervention is best for the specific borrower.

That is, unless the loan is owned or guaranteed by Fannie Mae or Freddie Mac, the country’s two biggest mortgage finance companies. Fannie and Freddie have yet to embrace one option—principal reduction—as a viable foreclosure mitigation tool.

By John Griffith and Jordan Eizenga

More than five years into what is arguably the worst foreclosure crisis in American history, millions of families are still at serious risk of losing their homes. Nearly one in four homeowners is “underwater,” meaning they owe more on their mortgage than their home is worth, and more than 7 million homes are still in the foreclosure pipeline, according to analysis from Morgan Stanley. In fact, some analysts predict we’re only halfway through the crisis.

The big question before lenders, investors, and policymakers today is how to avoid another wave of costly and economy-crushing foreclosures. There are several ways to lower an at-risk borrower’s monthly payments and increase the chance of repayment: refinancing to today’s historically low interest rates, extending the loan’s terms, modifying the interest rate, deferring payments, or lowering the amount the borrower actually owes on the loan—so-called “principal reduction.” In most cases the lender or mortgage investor responsible for the loan considers all of these options when deciding which intervention is best for the specific borrower.

That is, unless the loan is owned or guaranteed by Fannie Mae or Freddie Mac, the country’s two biggest mortgage finance companies. Fannie and Freddie have yet to embrace one option—principal reduction—as a viable foreclosure mitigation tool

Partially excerpted from Bond Buyer:

by Jennifer DePaul

The liberal think tank the Center for American Progress has proposed a plan to promote a new source of financing for troubled state housing finance agencies — the House America Bond.

A HAB would be a taxable, direct-pay bond, modeled after the Build America Bond program, which was created as part of the American Recovery and Reinvestment Act of 2009….

Jordan Eizenga, a member of the economic policy team at CAP and the author of the proposal, said issuers would not need a 35% subsidy rate, as that rate may have been too generous.

For more, see here.

by Jordan Eizenga

State housing finance agencies play an important role in the provision of affordable housing. As state-chartered institutions, these agencies emerged in the 1960s in response to the failure of private lenders and developers to finance affordable low- and moderate-income housing. With a detailed understanding of the needs of local housing markets, housing finance agencies are uniquely positioned to responsibly underwrite mortgages—often with down payment assistance—for low-income, first-time homebuyers and to finance the development of multifamily affordable rental housing.

Since their creation housing finance agencies have financed the construction of nearly 1 million affordable rental units and approximately 4 million affordable mortgages for low- and moderate-income households. Yet over the past several years, many of them have struggled to raise funds from their traditional source of capital—the tax-exempt bond market—at affordable rates and long maturities to finance their mortgage programs. This has made it more difficult for them to provide affordable mortgages for low- and moderate-income households where the lack of mortgage credit is greatest.

As this issue brief demonstrates, these funding challenges must be resolved if housing finance agencies are to continue to play an effective and central role in supporting their state and local housing markets. In particular, this brief argues for a promising new source of financing for housing finance agencies—what the Center for American Progress would like to call the “House America bond,” modeled after the successful Build America Bond program that was part of the American Recovery and Reinvestment Act of 2009.

For more, see here.

by Alon Cohen, Jordan Eizenga, Bracken Hendricks, John Griffith, and Adam James

Half a million houses, many of them vacant and deteriorating, are languishing in a bloated U.S. real estate market, threatening to turn some cities into ghost towns, undermining the stability of working families, and proving to be an anchor on a shaky economy. Many of these vacant homes, nearly a quarter-million, are controlled by the federal government.

If the situation wasn’t already bleak enough, there are also more than a million additional American homes saddled with delinquent mortgages that are in the process of foreclosure. Chances are many of these homes will also end up as the property of the federal government. The only way to lower the inventory of decaying homes is to find a use for the ones we have before new ones swell the pool. Without assistance, the current “overhang” of foreclosed homes is expected to take four years to work back into the market.

The good news is the Obama administration and independent federal regulators are formulating plans to sell government-controlled foreclosed properties to investors who would bring them onto the rental market. (For more, see here).

by Jordan Eizenga

The federal government has not yet implemented a program, authorized in legislation passed in September 2010, which, once up and running, will help so-called Community Development Financial Institutions invest in small businesses and communities hardest hit by the financial crisis.

by Jordan Eizenga and James Hairston

Starting November 1, Starbucks Corp. will begin collecting donations to provide capital for Community Development Financial Institutions as part of its “Create Jobs for USA” initiative. While Starbucks should be lauded for its efforts, Congress has already authorized a program that aims to expand the capacity of Community Development Financial Institutions to invest and create jobs in communities struggling to recover from the financial crisis.

(Click on the title for the rest of the article)

by Sarah Rosen Wartell, David M. Abromowitz, Bracken Hendricks, Alon Cohen, Jordan Eizenga, and John Griffiths

The Federal Housing Finance Agency, in consultation with the Departments of Treasury and Housing and Urban Development, last month issued a “request for information” to solicit ideas for selling or otherwise disposing of foreclosed properties owned by the Federal Housing Administration and the two mortgage finance giants Fannie Mae and Freddie Mac, both of which are under government conservatorship. The housing team at the Center for American Progress responded to FHFA’s request for information on the disposition of government-owned foreclosed homes. This is a summary of our response. (The full response letter can be downloaded here.)

by David Min, Jordan Eizenga and John Griffith

The announcement yesterday that the Obama administration will consider proposals to sell off large numbers of government-owned foreclosed homes is an important step toward a new system of U.S. housing finance. If designed well, this initiative could generate much-needed revenue for the government, expand the quantity of energy efficient, affordable housing to thousands of American families, and create well-paying jobs.

Government-supported entities own hundreds of thousands of foreclosed homes, mostly from mortgages insured before the housing bubble burst. These owners include the Federal Housing Administration, Fannie Mae, and Freddie Mac. Most of these so-called “real-estate owned” or “REO” properties are currently unoccupied and losing value as they deteriorate.

The White House addressed this issue yesterday by releasing a public solicitation for proposals on how to deal with this growing stock of REO properties. Their goal is to reduce the number of foreclosed homes in a way that minimizes taxpayer losses, expands affordable housing, and addresses property repair and rehabilitation needs.

For more of this article, see here.