This is a post from Jim Haughey's blog that covers the US construction industry.

Jim Haughey is the Chief Economist for Reed Construction Data and has over thirty years experience as a business economist, including twenty years monitoring the construction market. He has a Ph.D. degree in economics from the University of Michigan and has previously taught at the University of Michigan, Ohio University, Michigan State University and the University of Massachusetts.

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Construction Industry Forecasts

Notes from Jim Haughey - Mar 10, 2009

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Will mortgage fix v3.0 work better than it’s failed predecessors?
Jim Haughey, RCD Chief Economist

The plan costs $75 billion to reimburse private lenders for the buy-down of mortgage payments to 31% of monthly income and $200 billion to fund lower rate mortgage refinancing loans by Fannie Mae and Freddie Mac.

FHA Secure failed for two reasons.  First, the Washington insiders that crafted it vastly overestimated the share of households with troubled mortgages that had the will and the ability to fix their mortgage situation and stay in their home.  A large share of troubled mortgages was held by absentee speculators who had already decided to walk away from a bad investment. Another large share was held by low income households who had made little, if any, down-payment and had little, if any, equity to lose.  A teaser rate mortgage was cheaper than rent.  And foreclosures took longer than evictions.

Second, few people want an FHA mortgage if they can avoid it. Skip the rest of this paragraph if you ever had an FHA mortgage or sold a house to someone with an FHA mortgage. You already know why.  Getting an FHA mortgage is a long, ugly process.  FHA asserts its right to tell you and the seller what to do including how to manage your finances. I rejected an offer to sell my first house to a buyer who had an FHA mortgage acceptance as a contingency.  My agent let me know subtlety that I did not want this deal and that she had another full price offer waiting behind it.  After the rejection the agent told me that the FHA process could have taken several months longer and likely would had required me to make expensive modification in a 45 year old home.  The door to the half bath, for example, was not wide enough. My ancient plumbing made too much noise.  The abandoned coal room still smelled of coal dust.

Hope for Homeowners was an even bigger flop.  Reason one above applies here as well. Also, this plan required the participation of private lenders.  The largest mortgage lenders were coerced into the program because they had accepted TARP funds.  But their heart was not in it.  They did not want to work with bureaucrats who asserted the right to unilaterally change the rules.  And they feared very public audits of their participation.

 

V3.0 learned from the previous mistakes.  FHA was out, replaced by Fannie Mae and Freddie Mac who have a better reputation with homeowners. Voluntary cooperation with private lenders was out.  Now lenders will be told what to do. And the target market changed to homeowners caught by the recession with a mortgage “underwater” or a few dollars too little to make the monthly mortgage payment. And to encourage applicants, homeowners were promised up to $5,000 to make their payment on time.

The Homeowners Stability Initiative will likely help several hundred thousand homeowners avoid foreclosure, far short of the 9.0 million claimed. This number does not include later defaults on reworked or refinanced mortgages.  The recent FHA experience is nearly a 50% default rate.  I bought a home in 1980 with a 16.5% mortgage and a waiver from the lender to spent 29% (instead of the usual 25% limit) of monthly income on the mortgage payment.  With no other debts, it took a lot of belt tightening to make the payments. The Obama plan permits a total payment to income ratio of 35% which assures double-digits default rates on the refinanced mortgages.


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Member Comments

Posted by Shamus McQuade
03/11/2009
ACORN and their left wing “army” of bullies and in your face tactics along with Barney Frank and people who subscribe to his failed economic philosopies are responsible for Fannie Mae and Ginnie Maes collapse. Forcing some institutions to lower their criteria on financial solvency to give mortgages to people who could never pay it back or could never financially afford the mortgage, PLUS insurance, fuel costs, ect. associated with a home. Now they have their messiah in B. Hussein Obama they will turn up the heat to further their financial philosophy of “ON CREDIT” Their philosophy of live today don’t worry about tomorrow, put everything on credit, no savings coupled with consumption rather than savings, and entitlements rather than production has produced a HUGE trade deficit that also contributed. We need tax cuts, production, and savings, but the attitudes of gluttony, greed and selfishness will need to be overcome to get everyone to see the big picture.
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Read Other Recent Jim Haughey Posts

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