The treasury department’s Home Affordability Modification Program (HAMP) was touted as nothing short of an antibiotic to the growing foreclosure pathogen. Lenders were given a modest incentive to modify the failing loans and keep borrowers in their homes. While certainly a lofty goal the HAMP modifications do nothing to address the underlying, systemic problems facing the San Diego housing market.
Recently we were given the opportunity to look at purchasing several hundred loans that are both performing and have been modified under HAMP. The way these loans were rewritten is absolutely staggering and can be interpreted as little more than political grandstanding to delay the inevitable.
Imagine that a homeowner owes $100 on their home. They borrowed the money in 2004 – 2007, in the height of the housing crisis. Now their home is worth $50 in 2010. The HAMP modifications rewrite the loan to a 2% interest rate accruing on a $50 principal balance for 60 months. After that time the loan essentially returns to the original payment structure with the full $100 principal balance.
In essence, in five years, the homeowner’s payment quadruples and they owe everything they owed at the height of the market.
Do you see the problem? For these to be successful in the long run (or short run, depending on how you define five years) housing prices must return to near their bubble levels and they must do it quickly.
Unfortunately for homeowners in San Diego that seems a dubious claim. Voice of San Diego reported that home prices fell again in October. Albeit by a scant 1.6%, any decrease in prices only exacerbates the HAMP homeowner’s extremely troubling problem.
While nothing is ever for certain, there is a very real possibility the San Diego housing market, especially in price points over $500,000 is in the midst of a double dip. If the market is experiencing the early signs of a double dip or if housing prices remain stagnant the reality of the situation says that at the end of the five year modification those homeowners who overreached at the height of the housing bubble are going to default again.
What this means is that the foreclosure “crisis” has a real possibility of becoming something chronic that the market is simply going to have to get used to. When foreclosures continue because of these types of artificial market operations it seems likely that housing prices over the next decade will have a difficult time rebounding in any meaningful way.
The better option available for homeowners is not to modify into a loan they can’t afford now and won’t be able to afford in five years, but to bite the bullet and sell the home now. Resetting housing prices in San Diego in the short term needs to be a priority for San Diego real estate professionals, politicians and citizens alike.