The 2008 National Association of Regulatory Utility Commissioners (NARUC)
Collections Report came out this week. This association of state regulatory agencies surveys public utilities - 41 state agencies took part - to document payment problems experienced by residential energy consumers. The Summary Report is online, as well as a state by state tabulation. The headline is 1 in 5 consumers are behind. The share of utility bills that are behind is up a little bit between mid 2007 and mid 2008 (the survey took place earlier this year) and all evidence suggests things are worse now. Utilities may not cut off service in the winter and some sophisticated consumers might exploit this to pay off other bills first and pay utilities later...when spring comes and termination is threatened. Nevertheless the amount past due is also rising, as well as terminations and write offs, all of which are signs of distress.
The major policy at the federal level is LIHEAP (low income heating energy assistance program). This is about $5 billion block granted and distributed at the local level. This NARUC survey suggest less than 5% of gas consumers, and 2.5% of electric, get any help from this program.
Data from MortgageKeeper.org, which tracks what services mortgage default counselors are referring clients to, suggests as many as half of callers with referrals are looking for utility bill help. As winter sets in the trend is very predictable, especially in the Midwest.
There are only so many consumer dollars available to pay off monthly obligations. Proposals to boost LIHEAP or similar programs may have merit not only to help people in a recession but help prevent more mortgage defaults.
This issue highlights the need to better understand how many consumers manage their budgets. Financial education may help, but for some a pattern of trading off bills and late fees due to delinquencies may be rational and deliberate--but risky. Utility companies have robust data on payment patterns, including the form of payment (for example: money orders or cash = unbanked). Moreover utility company data offers information on consumers at all levels of income. Paying more attention to consumers in this market is likely to yield key proxy indicators of what is going on in the economy overall - yet another canary in the coal mine.
Friday, December 19, 2008
Monday, December 8, 2008
Tough Calls: A Mortgage Bailout
I spent a very interesting day and a half at the Fed last week at Housing and Mortgage Markets Conference. One idea that seems to be gaining momentum is that the Treasury (or FDIC, or FHA or all of these with the Fed) will start to buy pools of troubled loans with the idea of working out solutions to foreclosure. Now the FDIC has something like this with IndyMac- the FDIC took over this failing lender and is experimenting with modifications at scale. But for loans with interests across lots of private securities in the form or MBS (mortgage backed securities) this will not work. And this FDIC program is not getting strong response from borrowers because there is no principal reduction, and most are 'under water'. The FHA Hope for Homeowners (H4H) offers a solution, but lenders/investors must write down the principal balance and taking that loss is not attractive.
So the solution seems to be some method of buying pools, refinancing the loans into lower rate/lower balance mortgages, and then using FHA HFH insurance on the loans to make the loans something private lenders will hold. The result is the private MBS market comes back to life, borrowers who owe more than their home is worth will feel more secure and maybe ride out the house price drop, and home sales may stabilize. It makes some sense.
Problems? Many.
(1) It will be costly. Sure there is an upside if the government holds loans and performance improves. And with H4H any future appreciation of homes goes back to FHA and the Treasury (the borrower writes a check for 1/2 of any gain in value at sale or refinance). But there will be losses. And taxpayers in low foreclosure areas will be subsidizing those in high foreclosure areas with the aim of stabilizing 'national' credit and housing markets.
(2) Mechanism for purchase. How will Treasury pick which MBS pools to buy? It is unclear if the MBS pools have enough information available to make judgments about which pools will create the most bang for the buck. Since no other buyers in the MBS market have the ability to force mass loan modifications it is hard to imagine how pricing will work.
(3) Dealing with borrowers. How will they be contacted and lead into better loans? If deals are offered to all borrowers and borrowers opt in, some speculative borrowers who do not deserve it will latch on. While others will remain ignorant and miss out. Lots of issues remain here and judgments may end up being made about who deserves help. Further imagine sophisticated H4H borrowers who now see prices on the way up...there will be much gamesmanship in just when to sell or refinance to avoid a stiff appreciation penalty. And clearly borrowers who get their principal balance cut MUST pay some price for that...there is a strong moral hazard problem otherwise.
That said, of all the options on the table, this probably has the most merit. It seems very unlikely bankruptcy courts are a good route (timing, cost, volume, precedent, etc). And doing nothing will be very costly for the economy and credit markets. Foreclosure sales may run as high as 1 million out of the 4-5 million home sales this next year. 1 in 5 or 1 in 4 sales by some measures. Higher in some areas. We know forced sales like foreclosure depress home sales and prices (see this paper). It starts to add up fast.
One other theme I heard last week is that this housing market is actually quite normal. Most of the foreclosure problem is in CA, FL, NV and AZ. These states have been through boom and bust before. And the midwestern 'rust belt' is suffering but for a different reason - lack of jobs. It has been in a long term decline for quite a while. The rest of the country has pretty typical patterns in sales and prices for a recession. But because of the very high levels of consumer debt and the fact that that debt was sold and packaged as MBS and other forms of leveraged securities, and the fact that the housing market is moving at a national scale, unlike in past cycles, this one will be longer and deeper than before. There are signs the market will bottom out in 2009, based mostly in the CA, FL, NV, AZ markets' rapid tumble. But it will be a long flat bottom on the upturn, not a fast V-shaped recovery, mostly because credit markets are stuck but also the recession in jobs and investment will continue.
So, the outlook is not great. Policymakers have some tough calls to make. Doing nothing seems a poor course of action. Buying pools of MBS and boosting H4H (and investing in FHA infrastructure by the way) might just be the best available option if the details can be refined. With each passing week more research is coming out, lenders are reporting on new innovations and experiments and market participants are re-evaluating prices and information. The picture is getting clearer, and whatever happens it won't be cheap.
So the solution seems to be some method of buying pools, refinancing the loans into lower rate/lower balance mortgages, and then using FHA HFH insurance on the loans to make the loans something private lenders will hold. The result is the private MBS market comes back to life, borrowers who owe more than their home is worth will feel more secure and maybe ride out the house price drop, and home sales may stabilize. It makes some sense.
Problems? Many.
(1) It will be costly. Sure there is an upside if the government holds loans and performance improves. And with H4H any future appreciation of homes goes back to FHA and the Treasury (the borrower writes a check for 1/2 of any gain in value at sale or refinance). But there will be losses. And taxpayers in low foreclosure areas will be subsidizing those in high foreclosure areas with the aim of stabilizing 'national' credit and housing markets.
(2) Mechanism for purchase. How will Treasury pick which MBS pools to buy? It is unclear if the MBS pools have enough information available to make judgments about which pools will create the most bang for the buck. Since no other buyers in the MBS market have the ability to force mass loan modifications it is hard to imagine how pricing will work.
(3) Dealing with borrowers. How will they be contacted and lead into better loans? If deals are offered to all borrowers and borrowers opt in, some speculative borrowers who do not deserve it will latch on. While others will remain ignorant and miss out. Lots of issues remain here and judgments may end up being made about who deserves help. Further imagine sophisticated H4H borrowers who now see prices on the way up...there will be much gamesmanship in just when to sell or refinance to avoid a stiff appreciation penalty. And clearly borrowers who get their principal balance cut MUST pay some price for that...there is a strong moral hazard problem otherwise.
That said, of all the options on the table, this probably has the most merit. It seems very unlikely bankruptcy courts are a good route (timing, cost, volume, precedent, etc). And doing nothing will be very costly for the economy and credit markets. Foreclosure sales may run as high as 1 million out of the 4-5 million home sales this next year. 1 in 5 or 1 in 4 sales by some measures. Higher in some areas. We know forced sales like foreclosure depress home sales and prices (see this paper). It starts to add up fast.
One other theme I heard last week is that this housing market is actually quite normal. Most of the foreclosure problem is in CA, FL, NV and AZ. These states have been through boom and bust before. And the midwestern 'rust belt' is suffering but for a different reason - lack of jobs. It has been in a long term decline for quite a while. The rest of the country has pretty typical patterns in sales and prices for a recession. But because of the very high levels of consumer debt and the fact that that debt was sold and packaged as MBS and other forms of leveraged securities, and the fact that the housing market is moving at a national scale, unlike in past cycles, this one will be longer and deeper than before. There are signs the market will bottom out in 2009, based mostly in the CA, FL, NV, AZ markets' rapid tumble. But it will be a long flat bottom on the upturn, not a fast V-shaped recovery, mostly because credit markets are stuck but also the recession in jobs and investment will continue.
So, the outlook is not great. Policymakers have some tough calls to make. Doing nothing seems a poor course of action. Buying pools of MBS and boosting H4H (and investing in FHA infrastructure by the way) might just be the best available option if the details can be refined. With each passing week more research is coming out, lenders are reporting on new innovations and experiments and market participants are re-evaluating prices and information. The picture is getting clearer, and whatever happens it won't be cheap.
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