Second Day Leads: A Post-up on Obama’s Housing Plan
The equity analysts expected more. That may be the story of the first 30 days of the new administration. Validation of the strategies for fixing the financial system, for jumpstarting spending with a stimulus program, and halting the erosion of household wealth as a result of skyrocketing foreclosure trends will come or not come as the months grind along.
The story of the moment, however, seems to focus on expectations. Or rather management of expectations. Or rather mismanagement of expectations.
The incoming administration allowed expectations to soar. Stoked them, in fact. Set a bar unreasonably high for itself, and now is suffering the consequences of disappointing people who should know better that all of these programs, if they have any merit at all, will take more time to clarify, operationalize, and manage results from.
At face value, the belief system in the proposed Homeowner Affordability & Stability Plan is that a spigot-released $75 billion solution can offset a $300 billion problem.
Clearly, the devil in the details will come down to applying the rules of the program toward the selection of which mortgages to mitigate, the velocity of execution, the success-rate, the transparency, and the ability to stress-test the homeowners’ individual and collective scrupulousness and capacity to avail of the relief, thereby influencing a wider sphere people’s behavior and confidence level.
Just as clearly, the just-announced program falls short of delivering a shock-and-awe “fix” partly because of what it does, and partly because of what it doesn’t do.
Have a look at some top-line observations of a number of the home building equity analysts in their notes to their clients. One red-flag of concern regards the holes in the detail provided in the plan presented yesterday.
James McCanless, senior analyst at FTN Equity Capital Markets Group, believes the two-week lagtime between announcement of the program and rolling out specifics of how it’ll work can create an enormous negative drag right out of the gate.
We believe today’s tepid market reaction to the housing stimulus is due to a lack of detail in the White House and Treasury releases about who does and who does not qualify for the plan. Simple details such as an eligibility cutoff date or maximum household income for eligible participants would have provided some basis for analysis and discussion. Since those details are not scheduled for release until March 4, we think the near-term impact of the bill could be a general hesitation by lenders, buyers, and builders about any and all housing transactions. A similar effect was seen in December 2008 after Secretary Paulson made and retracted a 4.5% mortgage pledge during the month, and we believe the slowdown in December activity may be replicated over the next 2 to 3 weeks.
Further, McCanless seems to believe that a more rifle-shot program, vs. the blanket initiative proposed would have done a better job of nipping the problem in the bud, stemming foreclosures and breaking the free-fall in home prices. Here’s how FTN’s best-case scenario plan would have worked:
Our top 3 ideas/wishes for housing market revitalization are focused on stabilizing home prices through an isolation strategy for troubled mortgages. An isolation strategy would allow workouts and refinancings on a case by case basis and would not negatively affect the net present value of paying mortgages in the same geography. We believe this strategy would make banks more amenable to loan modifications and hasten the goal of home price stability through a faster clearing of problem borrowers and through a relaxed mortgage lending environment. Unlike the Treasury, we are not bold enough to assume our ideas would benefit the average homeowner by $6,000, but we do believe a resumption and restoration of functioning housing markets through proven strategies would have a generally positive effect on housing prices over the next 2 to 3 years.
So, from FTN’s standpoint, more clarity and more specificity as to the beneficiaries would have been the way to go. Josh Levin, home building analyst at Citigroup, is more generous with his assessment of the positives of the plan, with a caveat or two.
It is too soon to know how effective HASP will be at reducing future foreclosures. In the best case, we think HASP could mitigate some future home price declines. However, even in the absences of foreclosures we think home prices need to fall another 10%-15% based on the relationship between home prices and incomes and rents. Moreover, mitigating foreclosures does not change the fact that there are too many homes in the U.S. and it will take some time to absorb the excess inventory.
The team of David Goldberg and Eric Crawford home building analysts at UBS dismisses the ultimate impact of the plan in light of data that more than one out of two homeowners who’ve gotten new terms on their loans re-default within six months of the loan modification. Still, they’re not damning the initiative, only asserting that it will have limited impact in solving the urgent problems.
Although this plan will generate modest benefits, it is unlikely to curb foreclosures significantly, thereby minimizing its impact on home prices. Specifically, we expect “redefaults” among distressed borrowers who seek assistance to remain elevated. Further, although non distressed homeowners with LTVs in the specified range will benefit, we believe foreclosures among this group would have been minimal regardless. Finally, in our view, a trough in housing won’t occur until we see improvement in the broader economy, leading to greater demand.
Most skeptical of the plan’s design, scope, and likelihood of success or failure among the analysts we’ve heard from is Ivy Zelman, ceo of Zelman & Associates.
We are disappointed that the White House’s plan does not address the heart of the foreclosure problem, which is the negative equity position almost 30% of mortgage holders are currently facing. Absent principal reductions, our mortgage servicer contacts are concerned that re-default rates will remain above 50% as the problem is being delayed rather than solved.
More specifically, Zelman zeroes in on the plan’s failure to focus on geographies where its impact is most needed.
If the center of the economic problem is foreclosures, the epicenter is Arizona, California, Florida and Nevada as these states currently represent 45-50% of incremental foreclosures and underwater mortgage holders. We do not believe this plan will alter the mentality of the at-risk mortgage holder in the most troubled housing markets.
Calling for principal reductions is tantamount to letting the cat out of the bag on repricing assets up and down the financial system. Although the administration and its team seem bent on avoiding taking that course, more and more experts concur that it is inevitable.
Notably New York University economist and principal at RGE Monitor Nouriel Roubini.
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