Quelle Surprise! HUD and Obama Whoppers About Mortgage Settlement, FHA Finances, Housing Market Remedies Coming Home to Roost

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We took a very dim view of some of the Administration’s less-than-credible claims about its much-touted backdoor bank bailout, which was more popularly known as the mortgage settlement. And a rash of news reports tonight have caught the Administration out in its deceptions. From a March post, Memo to Shaun Donovan: Your Nose is Getting So Long You Need to Get a Hacksaw:

I couldn’t let this bit of propaganda go without comment. From the settlement FAQ:

Q: Will investors in mortgage-backed securities ultimately pay for part of this settlement?

A: Participating banks own the vast majority of the mortgage loans that this settlement is expected to affect. The settlement could affect some investor-owned loans, depending on existing agreements servicers have with those investors.

When banks weigh which mortgage loans to modify as part of this settlement, they will do so based on first analyzing the costs and the benefits of minimizing their losses. If a loan modification, including principal reduction, is projected to cost the creditor or investor less than foreclosure, the creditor will earn more on that loan.

In other words, this settlement will not force investors to incur losses. That’s because any loan modification tied to this settlement will result in more of a financial return for an investor than a foreclosure would.

OK, readers: did you notice how the question in the headline is never answered properly? The answer is YES. Bet you’d never conclude that from the verbiage that follows. Instead it starts off on the utter irrelevance of “mortgage loans that this settlement is expected to affect.” We’re not talking about numbers of mortgages or the many ways they can be “affected,” which is certain to mean something more than just loan modifications.

This is nowhere near as hard as settlement propagandist in chief Shaun Donavan is trying to make it. The banks are getting a 45% credit for modifying mortgages they don’t own. They will do that all day in preference to modifying their own mortgages, except in those cases where they would have modified them anyhow.

And since the banks are held to a total dollar target, and can use mods of other people’s mortgages to meet this target, they are using other people’s money to pay off their misdeeds. There are no two ways about it.

Now HUD may actually live in a parallel universe where they “expect” that the banks will operate against their economic interest and prefer to modify bank owned mortgages. If Donovan and his staff are so dumb that they believe it, as opposed to running clearly phony expectations by the media, they aren’t qualified to run a dog pound, much the less a major Federal agency.

Fast forward to today, where Shahien Nasiripour of the Financial Times tells us:

Investors in US mortgage securities have been forced to absorb large writedowns in response to a deal between leading financial groups and government agencies over the “robosigning” scandal….

The banks – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial – agreed to forgive billions of dollars worth of distressed borrowers’ mortgage principal in exchange for waivers from potential liability.

On Wednesday, BofA said that 60 per cent of the $4.75bn in first-lien mortgage principal it has thus far agreed to forgive would come from non-government guaranteed loans that were packaged into bonds and sold to investors.

Of JPMorgan’s $3bn in forgiven mortgage debt, slightly less than half has come from investors’ holdings, a person familiar with the matter said. The other three banks either declined to provide numbers or did not respond to requests for comment.

Earlier this year, some US senators worried that pension funds would have to absorb losses on their mortgage bond holdings as a result of a settlement meant to punish banks and aid troubled borrowers.

Obama administration officials tried to quell those concerns, first arguing that bond investors would not be forced to shoulder writedowns, then claiming that the “vast majority” of writedowns would occur on bank-owned loans.

“Many of us expected a settlement to hold servicers responsible for their misconduct; not a bank bailout settling with other people’s money,” the Association of Mortgage Investors said.

Now in case you just think this was HUD smoking something strong as of the time of the signing of the settlement, and cooler heads knew better but kept their mouths shut in the hopes no one would notice, think again. No less than the Great Deceiver himself was running the same line right before the election, less than four weeks ago (hat tip nathan):

We’ll just deal with the biggest whoppers (separately notice the emphasis on “responsible families”):

I never believed that the best way to deal with the housing market was to just sit back, do nothing, and simply wait for things to hit bottom….Instead, I’ve made helping those homeowners a priority.

Really? Priority relative to what? Redecorating Air Force One? That’s news to pretty much everyone, particularly “foam the runway” Geithner, who thought the only purpose of intervention was to spread out foreclosures over time, not stop them. Next up from Big Lie Central:

Since I took office, my Administration has taken action to help millions of families stay in their homes.

We teamed up with attorneys general in almost every state to investigate and crack down on the practices that caused this mess. And in the end, we secured a $25 billion settlement from the biggest banks – one of the biggest settlements in history – and used it to provide relief to families all across America.

As we’ve detailed, there were no investigations of origination fraud or chain of title issues. “Crack down” translates as “slap on the wrist.” And in many states, the settlement did not provide for borrower relief, it went to plug gaps in state budgets and to buy the silence of housing groups who’d otherwise call out this farce.

And then we have the main talking point of this short presentation:

And now I want every homeowner in America to have that chance. I just wish it didn’t require an act of Congress. But it does. So, back in February, I sent Congress a plan to give every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low rates. That’s the equivalent of a $3,000 tax cut.

It’s a plan that we know will work. It has the support of independent, nonpartisan economists and leaders across the housing industry. It’s a no-brainer that should have passed easily.

But Republicans in Congress banded together and kept this plan from even coming to a vote.

The chicken in every pot refi for every “responsible borrower” is flat out untrue (well, until you read the fine print and find out what “responsible homeowner” means). From BankingMyWay, which gave a layperson’s writeup of the objections to the Obama proposal when he first presented it, in the State of the Union address:

Overall, President Obama’s “January Surprise” would focus on underwater homeowners – a big problem in the U.S. today…

But passage of the Obama plan is hardly guaranteed. A growing consensus among Wall Street types is that the mortgage plan is “dead on arrival.”

But what if the consensus is wrong, and the plan makes it way to Congress? After all, $3,000 is $3,000 – and that represents a significant chunk of change to consumers and, presumably, to the U.S. economy. That seems to be what President Obama was going after last night.

“Responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief,” Obama said in his State of the Union address. “That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates….”

Sounds great, but there’s theory and then there’s execution. And it’s the latter that might curb legislators’ enthusiasm for this idea. Here are three reasons why:

1. The plan is too broad. President Obama used the term “responsible homeowners,” which presumably means homeowners who are under water on their homes, but current on their mortgages. But will legislators support a plan to bail out homeowners who are current on their home payments, three years after the recession was officially declared to be over? Here’s the key issue: Whether you’re current on your home payments or not, it’s not the responsibility of taxpayers to bankroll a mortgage payment cut – even if you do owe more on your home than it’s worth. The White House will need to answer that question before approaching Congress with a detailed plan.

2. The FHA might not be up to the job. The Federal Housing Administration would be the refinancing vehicle of choice under the Obama plan, backing all of the refinancing of underwater mortgages. But the FHA only has about $17 billion in capital right now, and faces a capital shortfall of anywhere between $35 and $53 billion. Legislators – especially Republicans – may well wonder if another huge taxpayer-funded bailout is looming down the road if the FHA is to avoid insolvency.

3. There could be a backlash from homeowners not under water, but barely treading water. Again, the plans are sketchy, but so far the target appears to be focused strictly on underwater homeowners who have taken the biggest hit from falling property values. If that’s the line the White House draws in the sand, expect a backlash from consumers who may have home mortgage troubles of their own but don’t qualify for the $3,000 refinancing deal.

Now if you look at the quote from the SOTU, points 1 and 3 look like reasonable surmises. And perhaps most important, notice the claim that “Wall Street sources” said the plan would never see the light of day. This means the Administration almost certainly knew from the outset that this idea was dead in the water, but it would serve (as it did) as a useful talking point down the road.

And it turns out the concern voiced in point 2 about the FHA’s wasn’t Republican obstructionism. FHA loans, despite their low down payment rates, historically had low default rates. But that was before the crisis. After the crisis, the FHA became the refinancer of last resort, and many observers have anticipated its default levels would rise considerably.

As Nick Timiraos reports tonight in Housing Agency Close to Exhausting Reserves the Wall Street Journal:

The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency’s finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history….

Though the agency guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed.

The FHA’s annual audit estimates how much money the agency would need to pay off all claims on projected losses, against how much it has in reserves. Last year, that buffer stood at $1.2 billion, representing around 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level, which it breached three years ago…Because the FHA has what is known as “permanent and indefinite” budget authority, it wouldn’t need to ask Congress for funds; it would automatically receive money from the U.S. Treasury.

The article points out that for the last three years, the Administration has hotly denied that any shortfall could take place save under the most dire circumstances. So if Team Obama has made homeowners such a big priority and been so effective in fixing the housing market, why is the FHA likely to need a cash injection? Matt Stoller pointed out via e-mail that concerns about FHA lending date to 2008, as this article in Bloomberg chronicled:

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more…

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening—or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more.

Let’s do a little math. The FHA has $1.2 billion of capital, which is 0.12% of its required level as of end of last year when it is required to have 2% of its $1.08 trillion in guarantees. So before allowing for losses, the FHA is already over $20 billion short.

And how bad might those losses be? We have 739,000 loans in foreclosure or seriously delinquent. These are all generous assumptions (as in favorable to the FHA): $100,000 average loan balance, 25% can be saved with a 40% principal mod, the rest are liquidated with 75% losses. That’s another $49 billion, or $69 billion in total.

So this isn’t quite a $100 billion problem, but it is easily on the wrong side of $50 billion. But Obama would rather have you not think about that and focus instead on the $3,000 pony those meanie Republicans won’t let you have for Christmas.