Will California cramdowns give a boost to the real estate market?
- No (56%, 32 Votes)
- Yes (44%, 25 Votes)
Total Voters: 57
Real mortgage relief is on the horizon for California homeowners, according to officials for the Keep Your Home California program.
Three years ago, the California Housing Finance Agency (CalHFA) allocated $2 billion in Toxic Asset Relief Program (TARP) funds to provide foreclosure relieve to struggling California homeowners.
To date, only about $300 million of the funds have been used to help homeowners. In part, the program has dispersed funds so slowly due to weak participation from the big banks.
The big banks had shied from the program since Fannie Mae and Freddie Mac (Frannie) were requiring the banks match the amount of taxpayer funds used for the program. Frannie has lifted that restriction and the banks are now on board, which ought to substantially ramp-up the speed of mortgage relief for qualifying homeowners.
What’s most significant about the California-based program is that it allows for principal reductions, or cramdowns. Since TARP funds allocated to California will be used to cover the cost of cramdowns, Frannie has no objection to this specific program’s use of principal reduction.
first tuesday insight
We don’t want to speak too soon, but the fact that this program will provide cramdowns is a real “W” for the California real estate market. It has been a protracted struggle, but if principal balances are crammed down to fair market value (FMV) this could spur a virtuous cycle of real estate sales volume (not prices), turnover and market mobility that California has yet to see in this “recovery.”
The catch words are in the term “qualified homeowners.” Let’s trust the officials not to determine that if the negative equity homeowner is qualified to pay on the upside down mortgage that they are not qualified for debt reduction.
The remaining negative equity homeowners are those who were unable to qualify (there is that word again) for a short sale because, well, they were “qualified” to pay. Hardship will have to be redefined in economic terms, not the financial terms used by the lenders.
Hopefully California will be an object lesson for the Federal Housing Finance Agency’s (FHFA) Director, Ed DeMarco, who still insists on forbidding cramdowns for Frannie-owned loans. Keep the people and the economy stifled, is DeMarco’s motto, especially since California has the greatest problem with negative equities on 2,000,000 homes.
Of course, the timing isn’t great for home prices, but to counter sales volume declines since November 2012, the timing is great. Due to speculator activity in the California market, what’s considered FMV is currently inflated upwards of 15% above the historical mean price. However, considering the price peak in early 2006 were more than 100% inflated over the historical mean price, we’ll take the reductions to currently inflated prices!
It’s nice to see that some of the funds used to bail out the banks five years ago are finally being used to bailout California homeowners buried under the other end of those bank mortgages.
Re: “Foreclosure-relief funds earmarked for California mostly unspent” from the LA Times