The role of Federal government in financing housing has grown so dramatically since the outset of the housing crisis that the government now no longer simply supports the mortgage market. It has taken on so much of the risk involved in financing housing that it has become the market, with the taxpayer shouldering the risk that had once been borne by the private investor.
That’s the view Neil Barofsky, the Special Inspector General for TARP, in his most recent quarterly report to Congress. Click on the link above for a copy.
Barofsky makes his case in the report, discussing how TARP programs, particularly the Asset Guarantee Program, the Home Affordable Modification Program and the Public-Private Investment Program play key roles in supporting the Federal commitment to the mortgage markets. Federal programs now stretch from origination to guarantor to securitization and finally to domination of mortgage backed securities markets.
In discussing home prices, Barofsky states plainly, “Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”
“In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income. Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices. In addition to direct Government activity, home prices can be lifted by general expectations among homebuyers of future price increases.”
The SIG report included an accounting of the Obama Administration’s mortgage modification program. TARP provides $50 billion to the Home Affordable Modification Program (HAMP). Through the end of the year, Treasury had signed agreements with 102 loan servicers allocating up to $35.5 billion. Of that $35.5 billion, as of December 31, 2009, $15.4 million had been spent on incentives for 11,574 of the 66,465 permanent modifications, or about $1330 per loan. The remaining permanent modifications will receive incentive payments in the next quarter.
Of that $15.4 million, approximately $12.1 million represents incentive payments to servicers and $3.2 million represents payments to investors. Borrower incentive payments begin only after one year of participation in the program.
To date, the largest allocation of incentive payments went to Countrywide Home Loans Servicing LP, now owned by Bank of America, which is eligible to receive up to $6.8 billion in TARP funds. The average allocation to each servicer through HAMP is $348.5 million. The amount of funding allocated to a servicer does not represent the amount of incentives paid to the servicer; rather, the allocation is the maximum amount, or cap, of potential incentive payments that Treasury has approved for each servicer.
As of December 31, 2009, 102 servicers had signed Servicer Participation Agreements to modify loans under HAMP. Participating servicers have initiated 902,620 trial modifications, but only 66,465 of these modifications have become permanent modifications.