Blown Mortgage » Real Estate Musings

More than half of homeowners have remodeling plans this year

Jay Hammond — Sat, 04 Jul 2009 02:50:00 +0000

It looks like it going to be a busy year for do-it-yourselfers. A new poll from Consumer Reports reveals that 54 percent of homeowners participating in the poll plan some type of remodeling project during the next 12 months. Sixty-five percent of them plan to do the work themselves.

Now, remodeling is not unknown among homeowners, even during boom times. The recent economic downturn, however, has forced 67 percent of homeowners to rethink their plans. The biggest changes to remodeling plans include:

Doing the work themselves – 42 percent
Fixing or sprucing up what they already have – 39 percent
Remodeling in phases – 36 percent

According to the Consumer Reports poll, the most popular types of work include painting (56 percent), designing (39 percent) and flooring (34 percent). The most popular remodeling projects are kitchens (19 percent) and bathrooms (17 percent).

“Whether homeowners are venturing into a project themselves or plan to hire a professional, you need to lay out a budget, decide what you want most at the end of the project — and decide what you can live without,” advises Bob Markovich, senior home editor at Consumer Reports. “The more homeowners know what they’re getting into, the more money they’ll save.”

Remodeling funds come from a variety of places. Most homeowners, 66 percent, support their projects with their savings. Others, 29 percent, plan to cut back on travel and entertainment while another 21 percent are using a home equity or other loan.

The biggest reason consumers are cutting back on remodeling is that they simply do not have the money, according to 42 percent of respondents. Many homeowners, right now, are focused on paying, modifying or refinancing their mortgage rather than remodeling. There are homebuyers out there, like Chad and Brittany Johnson in Ohio, who purchase a foreclosure home for far less than market price and immediately remodel it.

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Is Trust Returning to the Mortgage Industry?

Jay Hammond — Wed, 01 Jul 2009 16:12:57 +0000

“The economy is based on trust,” said Dean Johnson, associate professor of finance at Michigan Technological University in Houghton, Michigan.

In situations like the recent housing bubble, or even the stock market collapse of 1929, where markets were driven by debt and fueled by the false expectation that values can only increase, trust can be a very fragile thing.

“One little blip and everything started to unwind,” Johnson said. “The particulars are different, but the basics are familiar.”

Trust, however, seems to be coming back, according to Johnson. If people are cautious and not spending money, the government and financial industry must take action to encourage capital liquidity. During the first half of 2009, this is exactly what they have been doing. And if the effects have not been as immediate as some would like and others needed, at least their efforts are beginning to take effect.

Why does Johnson believe trust is returning? He points to the Volatility Index, or VIX, which measures investors’ expectations of how volatile the stock markets will be. The VIX reached all-time highs in 2008.

“People think of it as the fear gauge,” Johson explained. “it’s encouraging that the VIX, though still high be historical standards, is down about 60 percent from what it was at its peak in November.”

Other, more recent, signs that trust is being rebuilt in the American housing/real estate markets and the financial industry include:

USA Today reports that while the construction market remains weak the housing market may be improving slightly. Residential construction reportedly dropped to the lowest level since December 1995. Pending homes sales increased slightly in May, according to the National Association of Realtors (NAR).
Proposed legislation to create a Consumer Financial Protection Agency is making progress at the federal level, according to the Washington Post. The Post reports that the Treasury Department’s proposal for a new federal agency to consolidate the plethora of state and federal regulators responsible for overseeing the lending industry arrived on Capitol Hill on Tuesday.
At the end of June, Fannie Mae, which is still under the conservatorship of the federal government, reported its mortgage portfolio grew at a compound annual rate of more than 35 percent in May. A report from Dow Jones appearing in the Wall Street Journal indicates a large jump in the issuing of mortgage-backed securities offset continued rises in single-family and multi-family mortgage delinquencies.

Notes of caution, however, are also being heard. Yale University economist and co-founder of the S&P/Case-Schiller home-price index, Robert Schiller told Bloomberg: “At this point, people are thinking the fall is over. The market is predicting the declines are over.” At the same time he is “not optimistic that we’re going to see any sharp rebound.”

Johnson agrees with Schiller.

“It’s still a risky market,” Johnson stresses. “This is the first time in history that you’ve been better off if you’d put your money under a mattress 10 years ago. But hopefully, this indicates that the financial markets are returning to normal.”

Of course this doesn’t mean the housing market or the financial industry will be returning to the halcyon days of pre-mortgage crisis days anytime soon. It doesn’t matter how badly investors, bankers, consumers, lenders, the government or the world at large want it.

“There’s no easy fix,” Johnson concluded. “We have to take our medicine. It took 20 years to create the over-leverage and it will take time to undo that.”

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No “green shoots” in employment

Morgan — Sun, 21 Jun 2009 21:52:15 +0000

Unemployment rose in nearly every state in the nation in May, with many reaching record unemployment levels not seen since 1976. So much for green shoots. If 70% of our economy is driven by consumer spending, and more and more consumers are out of work, how exactly are we coming out of this mess? Where is the driver going to come from? Even with the government doing everything it can to keep the printing presses pumping out money there isn’t a viable way to easily replace that massive consumer spending. I’m no economist, but the common sense in me says that an umemployed consumer doesn’t spend like one with a job and a house-sized ATM.

The top hardest hit states in terms of unemployment are: Michigan, Oregon, South Carolina, Rhode Island and California. (Image courtesy of CNN.com)

When you’ve got the nation’s most populous state in the top 5 in unemployment, a budget deficit of $20+ billion and new taxes going in left and right (not to mention a whole slew of Option ARM resets coming down the pike) it’s rather silly to be talking of recovery at this stage in the game.

What do you think?

Some more images of doom from CNN:

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California Foreclosure Prevention Act goes into effect tomorrow

Morgan — Mon, 15 Jun 2009 05:36:31 +0000

The state of California is imposing a 90-day moratorium on all foreclosures as part of the new California Foreclosure Prevention Act that goes into effect tomorrow. The law requires that lenders prove they tried to modify a borrower’s loan before initiating foreclosure proceedings.

From the San Jose Mercury News:

The law is expected to make lenders try harder to keep borrowers in their homes. Loan companies must prove they tried to modify the delinquent loans before they can begin foreclosing.

But supporters acknowledge the California Foreclosure Prevention Act won’t stop thousands of foreclosures from eventually happening. There have been more than 365,000 foreclosures in California since early 2007, with many more already scheduled.

The highlights of the law are (from California Assembly Member Ted Lieu’s site):

1. Imposes a 90 day foreclosure moratorium to allow distressed homeowners time to work out loan modifications with their lenders.

2. Allows lenders to avoid the moratorium if they have a comprehensive loan modification program based, in part, on criteria set forth by the Federal Deposit Insurance Corporation. Loans may be modified several ways, including interest rate reductions, extension of the loan term, or principal reduction.

3. Provides oversight and accountability by requiring regular reports to the legislature on loan modifications and foreclosure reductions, and coordination with appropriate state regulators.

We have some real rocket scientists up in our state legislature. At least I’m not the only one who thinks this is completely idiotic. From Mish:

This bill is no more likely to work than a bill declaring poverty to be illegal or the sky to be green.

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Is drop in home values nearing terminal velocity?

Constantine von Hoffman — Tue, 26 May 2009 17:16:04 +0000

The best that can be said about S&P/Case-Schiller numbers out today is maybe home prices can’t fall any faster. Prices for Q1 of this year dropped at 19.1%, .9% more than they dropped in the last quarter of ‘08. The 20-city index dropped 18.7% year-over-year, also a record. It fell 18.5% during the last three months of 2008. This index has plummeted 32.2% from its July 2006 peak and has fallen 32 straight months.

The Wall Street Journal has a great sortable chart here. The biggest surprise in the numbers is in Minneapolis which suffered the worst quarterly decline, 6.1%, and is down 23.3% from a year ago. It ranked ahead of even Detroit, the #2 on the list with results of 4.9% for the quarter but which was down much further Y2Y at 25.7%. I suspect Detroits values should be one of the first areas where prices will stabilize (eventually) if only for the reason that they have hit bottom faster.

Twin Cities Realtors are reporting a slightly different result. They report that the median sale price for a home in April was $153,000 — the fourth month in a row where the median price in the metro area stayed between $150,000 and $155,000. Leading some Realtors to suggest that prices may have stabilized. The reason for this difference is that Realtor numbers are based on the median price of all houses sold in a given month whereas Case-Shiller looks at homes that have sold in a month, and compares the sale prices with what they previously sold for.

The oddest numbers in the survey come from Phoenix which was both over-developed and over-financed during the bubble and has take a huge hit in home values as a result. While prices were down 36% Y2Y according to Case-Shiller, the rate of decrease seems to have slowed.

According to an Arizona State University report. homes “sold for a median price of $117,500 in April, down from a $119,000 March estimate, $121,000 in February and $130,000 in January. Not long ago, prices were dropping by $10,000 to $12,000 a month.” This may be the result of speculators buying the now steeply discounted housing. The New York Times reports,

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

At these new lower prices investors are finding they can sometimes make money and keep the previous owners in these properties by charging them less in rent than they had been paying on their mortgages. However some comments make me wonder how much people have learned from all this.

“I bought too high a few years ago,” said Jason Fischbeck. “It cost $225,000. Now it’s worth $110,000. So I just paid $80,000 cash for another. ”

I hope for the sake of all of us that this gamble turns out better than previous one.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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Declining home values sink one-fifth of homeowners

Jay Hammond — Wed, 06 May 2009 21:31:39 +0000

U.S. home values fell for the ninth consecutive quarter during the first three months of 2009 leaving one in five American homeowners with negative equity in their homes. The first quarter Zillow Home Value Index fell to $182,378, a decline of 14.2 percent over the same period in 2008. The last time the market was at this level was the first quarter of 2004.

Of the 161 metropolitan areas covered by the Zillow Real Estate Market Reports, the five best performing markets are:

Fayetteville, NC, where home values increase 14.4 percent to an average value of $118,121
Oklahoma City, OK, where home values increased 5.1 percent to an average of $118,446
Binghamton, NY, where home values increased 2.5 percent to an average of $114,604
Jacksonville, NC, where home values also increased 2.5 percent to an average of $138,881
Cumberland, MD where home values increased 2.3 percent to an average of $82,174

The five worst performing markets were all in California, although the decline has slowed somewhat in some locations. For example, the Zillow Home Value Index fell 18.9 percent in the Los Angeles metro area and 18 percent in San Diego. Both declines as less than the drops experienced during the third and fourth quarters of 2008. Unfortunately, the value index in both markets remain more than 30 percent lower than previous peak markets.

The five metropolitan areas posting the worst performances are:

Salinas, CA where home values declined 36.6 percent to and average of $301,793 (a level not seen since the second quarter of 2000)
Redding, CA, where values dropped 34.1 percent to and average of $197,193
Stockton, CA, where home values fell 32.4 percent to an average of $175, 484
Madera, CA, where values declined 32.1 percent to ad average of $151,392
Vallejo-Fairfield, CA, where home values dropped 31.8 percent to an average of $235,385.

As previously reported, pending home sales increased slightly during March. A Zillow survey of homeowner sentiment however, reveals that potential sellers appear to be holding back waiting for the housing market to show signs of recovery. According the the Zillow survey, 31 percent of homeowners are at least somewhat likely to put their homes on the market during the next 12 months if they felt the real estate market was improving. Of those willing to consider putting their homes on the market, 71 indicate increasing home sales in their neighborhoods would be evidence of a turnaround in the market.

“Slowing declines in select markets are a bright spot or, at least, what passes for one given current market conditions,” said Dr. Stan Humphries, Zillow vice president of data and analytics. “Unfortunately, given the magnitude of the current rates of decline, we’re still many months away from a bottom even as depreciation slows. Moreover, the additional information we have this quarter on ’shadow inventory,’ with one-third of homeowners indicating they would like to put their home on the market if conditions improve, confirms our earlier fears that a bottom in home values could be quite protracted. By our calculations, this could translate into as many as 20 million homes that could seep into the market as prices stabilize, maintaining a constant stream of supply that far outpaces demand, thus keeping prices flat. I’m doubtful that we’ll see the bottom until 2010, and thereafter it’s increasingly clear that we’re likely to have a long bottom before we see meaningful recovery in home values.”

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Some Good Housing News

phillenbrand — Mon, 04 May 2009 18:23:18 +0000

If you’re an optimist like myself, you’ve probably grown tired of the constant hum of negative or depressing news as it relates to the housing market. More delinquencies here, higher foreclosures there, falling prices over there. After months of terrible news with no end in sight, we’ve seen some hints that things are, at the very least, not world-endingly bad. I wouldn’t go so far as to call it a recovery since, hey, I have no crystal ball that still works, but let’s take a look at what we have.

First, the big news of the day is that pending home sales actually rose 3.2 percent in March. According to the National Association of Realtors, that’s due mostly to the fact that first time buyers are emerging from the woodwork to take advantage of newly affordable prices. Of course the group’s chief economist goes on to point out that this doesn’t mean we’re on the road to recovery just yet. In fact, we’ll need “several months of sustained growth to demonstrate a recovery in housing, which is necessary for the overall economy to turn around.”

While that’s good news for housing (and first time buyers getting in on what could be the ground floor), there’s also been a slight drop in foreclosures in at least one state that has taken this housing crisis right on the chin: California. The California Mortgage Bankers Association recently reported a slight drop in the delinquency ratio rate for the first quarter of 2009.

Encouraging signs, to be sure, but some obstacles still remain. An increasingly difficult balancing act is getting new buyers connected with a new home at an attractive price. Now more than ever, mortgage lenders are looking very closely at FICO scores and other indications, and if your credit is less than pristine, you won’t be getting that wonderful rate that we keep hearing about. Of course lending to unsuitable buyers was in large part what got us here in the first place, so one can understand lenders’ collective erring on the side of caution. Hopefully, as conditions improve, we’ll see newer, reliable borrowers continue to emerge to help buy up low-priced housing at an attractive rate, but we’re not there just yet.

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The ups and downs of mortgage fraud

Jay Hammond — Tue, 28 Apr 2009 01:06:33 +0000

The FraudBlogger Index climbed to 1427 during the first quarter of 2009, double what it was in the first quarter last year. Already in April a federal grand jury has indicted four individuals as part of a massive â€œDream Homesâ€ mortgage fraud scheme and 24 individuals in a Racketeering Influenced and Corrupt Organizations Act (RICO) conspiracy in a mortgage fraud scheme based in San Diego, CA.Â At the same time, Congress is looking to extend federal fraud laws to cover mortgage businesses and increase funding for mortgage fraud investigations.

Looking back at the quarter that was

The bad news is that is double the amount of fraud activity seen during the first quarter of 2008, according to MortgageDaily.com. The good news is that fraud activity actually declined by nearly half (49 percent) compared to the previous quarter. More than $1.5 billion in mortgage fraud cases were tracked at some point during the first three months of 2009.

Around $300 million in open fraud activity helped push Utah’s state index higher than any other state in the nation during the quarter. Rounding out the top five were Texas, Florida, Pennsylvania and Minnesota. Utah also led the nation by dollar amount of mortgage fraudÂ Â followed by Florida, Utah, Minnesota, Pennsylvania and New York.

Among the notable fraud cases brought during the first quarter were:

A California mortgage broker who originated $1 billion in fraudulent loans throughout six states. When he was caught at the Canadian border, he had $70,000 stuffed into his boots.
Another California broker allegedly use the social security numbers of 25 children.
In Maryland, one mortgage broker us the proceeds from more than $30 million in fraudulent loans to pay for her $800,000 wedding.
A bank vice president in Minnesota pled guilty to forging her husband’s name on a $200,000 mortgage.
In Texas, a woman was sentenced to 99 years in prison for her role leading a $3 million scheme. Other family members including he husband, sister and daughter have also been indicted.
A city councilman in Pennsylvania pled guilty to helping his daughter commit fraud.
An executive of the Federal Deposit Insurance Corporation (FDIC) recently testified that one straw buyer was given a suitcase containing $10,000 cash in exchange for closing on an IndyMac loan.

A new quarter begins

Although the number of fraud cases declined during the start of 2009, this does not meanÂ Â law enforcement and investigators are not vigorously pursuing mortgage fraud cases. In fact, the U.S. Department of the Treasury, the U.S. Department of Justice, the Department of Housing and Urban Development, the Federal Trade Commission (FTC) and the Attorney General of Illinois announced a new multi-agency crackdown on mortgage loan modification fraud and foreclosure rescue scams in early April. The new effort will align responses from federal law enforcement agencies, state investigators and prosecutors, civil enforcement authorities and the private sector to protect homeowners from predatory schemes and criminal fraud.

â€œThe Criminal Division and the U.S. Attorney’s Offices are jointly committed to redoubling our efforts to uncover and prosecute fraud and abuse in all facets of the housing market â€“ a market upon which so many American families have pinned their hopes and their futures for so many years,â€ said Lanny A. Breuer, Assistant Attorney General of theÂ Criminal Division. â€œI want to assure the American public that we will not rest until the tide of this criminal activity is turned.â€

Within days of the announcement, 24 individuals were charged in San Diego with racketeering for allegedly participating in a mortgage fraud scheme that involved 220 properties with a total sales price exceeding $100 million. The indictment alleges that the defendants devised a scheme to defraud mortgage lenders and to obtain money and property by false and fraudulent means. Darnell Bell, the alleged leader of the group, is said to have received at least $9 million from the scheme while Stanley Gentry, a licensed real estate broker who facilitated the fraudulent purchase of property in exchange for a monthly payment of $10,000. Several real estate businesses, including the Ivy House, Inc., the Real Estate Center of Southern California, and the Real Estate Center of La Mesa, were allegedly used by the group to purchase real estate between January 2005 and April 2008 or even more recently.

â€œThis indictment represents the largest mortgage fraud case ever prosecuted in the history of the Southern District of California,â€ said U.S. Attorney Karen P. Hewitt. â€œAlthough this case marks an important milestone for the U.S. Attorney’s Office, the FBI and the IRS, we have much additional investigative work ahead of us to hold accountable those individuals who engaged in similar mortgage fraud schemes throughout San Diego and Imperial counties.â€

More recently, on April 22, four individuals were indicted and information was filed against a fifth person for their part in a purported mortgage payment program called the â€œDream Homes Program.â€ According to the indictment, from 2005 to 2007 more than 1,000 investors invested approximately $70 millionÂ with the defendants under such corporate names are â€œMetropolitan Grapevine LLCâ€, â€œMetro Dream Homesâ€ and â€œPOS DH LLCâ€. The indictment also seeks forfeiture of the fraud proceeds, including the $70 million. The prosecution is being brought jointly by the Maryland and Washington, D.C. Mortgage Fraud Task Forces, which are comprised of federal, state and local law enforcement agencies in Maryland, Washington, D.C. and Northern Virginia.

â€œThe indictment alleges that the defendant used slick marketing to conceal empty promises,â€ explained U.S. Attorney Rod J. Rosenstein. â€œThey convinced many victims to invest at least $50,000 by refinancing their existing homes or buying new homes at inflated prices, while claiming that Metro Dream Homes would repay the mortgages with revenue from profitable businesses. The indictment alleges that there was no revenue to pay the mortgage payments. Instead, the conspirators used some of the investors’ money to repay earlier investors in the Ponzi scheme and spent the remainder on themselves.â€

It should be noted that indictments are not findings of guilt. All defendants in these cases are innocent until proven guilty in a court of law.

‘The individuals charges in this indictment have one thing in common: greed,â€ said FBI Special Agent-in-Charge Keith Slotter, regarding the San Diego case. â€œThey represent precisely those who have undermined our country’s financial system perpetuating such egregarious schemes. The FBI and our law enforcement partners remain vigilant and will pursue those who engage in this type of criminal activity. The extent to which this groups of people went to defraud lenders should also serve as a warning to the public. We urge people to come forward with information of suspicious activities they may encounter when engaged in real estate and mortgage transactions.â€

Funding future investigations and prosecutions

Reuters reports that the U.S. Senate is closer to extending federal fraud laws to cover mortgage lending businesses and provide more funding to federal agencies pursuing mortgage fraud investigations. The Senate bill would also create an independent commission charged with investigating the cause or causes of the current economic crisis. There is a similar bill pending in the U.S. House. To become law both houses of Congress must agree on a final version of the bill which is then presented to the president for his signature.

Senator Charles Schumer (D-NY) is also calling on the federal government to helpÂ district attorneys across the country fight mortgage fraud. The New York Times reports Sen. Schumer is seeking federal grants totaling approximately $100 million and earmarked for the investigation and prosecution of mortgage fraud at the local level. The grants would help district attorney offices demonstrating a need for increased resources to combat mortgage scams hire specialized staff including investigators, forensic accountants and attorneys. The fighting Real Estate Fraud Act of 2009 would also create Real Estate Fraud Units that would focus exclusively on real estate crimes.

â€œHousing scams are a nationwide solution,â€ Sen. Schumer said. â€œHomeowners in New York and across the country have suffered for too long because of scam artists who feel they can take advantage of people without any repercussions. These fraud units will help protect homeowners from these criminals and ensure that rather than walking away from their crimes, they are prosecuted to the fullest extent of the law.â€

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Hitting Bottom

Jay Hammond — Tue, 07 Apr 2009 20:13:55 +0000

How close are the mortgage and housing industries to bottoming out? Is the worst yet to come or is the economy already on the way up and out of this mess? The answer, it seems, depends on who you ask.

“An unexpected jump in new and existing home sales, a fairly sharp increase in mortgage applications and a surprise increase in pending home sales prompted many to declare the bottom in housing in the month of February. Even home prices, which had been falling like a rock, showed some signs of stabilizing during the month. Moreover, speculators appear to be re-entering the market, picking up properties on the cheap,” explained Diane Swonk, chief economist of Mesirow Financial and author of the annual housing market edition of the Themes on the Economy.

This sounds like good news. On the other hand, the mortgage industry is on pace to set a new record this year…for failures, according to MortgageDaily.com.

Mortgages

This year 25 non-mortgage firms, 21 banks and 4 credit unions had failed by the end of March, Mortgage Graveyard, reports. Extrapolated to the whole year, that is a total of 200 companies compared to only 120 in 2008. The most dramatic increase, if the current pace holds true, is in bank failures where 2009’s 21 is just four short of 2008’s total. Among the banks which have failed this year, are institutions in three in California, one in Colorado, two in Florida, four in Georgia, one in Kansas, three in Illinois, one in Maryland, one in Nebraska, one in Nevada, two in Oregon, one in Utah, and one in Washington. That the banking industry has not yet bottomed out seems to be the message from the Federal Deposit Insurance Corporation (FDIC) as well.

“I see some glimmers of hope. I’m cautiously optimistic that the industry is getting on a better footing. Many banks are making money. So i see our efforts beginning to pay off. But to be honest, there’s still more pain to go,” FDIC Chairman Shelia C. Bair said at the American Bankers Association (ABA) Government Relations Summit in Washington, D.C. last week.

The effort by banks across the nation to rewrite toxic assets including mortgages will mitigate the magnitude of foreclosures and defaults over the next 18 months, according to a recent report from Portland Cement Association (PCA) Economic Research. Resets of “traditional subprime mortgages, however, are not expected to reach their apex until mid-2009 while resets of more exotic mortgages such as Alt-A and option adjustable mortgages will continue through mid-2010, according to Edward J. Sullivan, PCA chief economist.

Housing

“The housing market is still a long way from healthy: home sales are still down substantially from the lows they hit during the turbulence of the fourth quarter, pending sales were at such low levels, there was really nowhere to go but up, and more than 70% of the mortgage applications we saw in March were refinances instead of purchases,” said Swonk.

In other words, the housing market has bottomed out or is on the verge of doing so, simply because it can’t get any lower. Single family home starts are almost zero and multi-family starts are also exceedingly low., yet both are expected t continue to decline. Since it’s easier to to get a mortgage to buy a home than to build one, home sales may have already bottomed out. Home prices, however, are expected to continue to fall. The experts at PCA also expect a weak labor market and declining home prices to increase the number of properties in foreclosure adding to the housing market inventory and further slowing sales.

“Housing is expected to swing from a drag to a push on overall GDP growth in 2009, for the first time in four years. That shift, coupled with tax incentives to lower the carbon footprint of individual homes, is expected to provide a boost to spending on everythin from furniture and appliances to building materials. Any gains that we do see in housing-related activity, however, will pale when compared against previous recoveries,” Swonk concluded.

Whether they believe we’ve seen the worst or not, most experts agree that patience is needed. If there is a silver lining to the situation, it is that if the economy has not quite hit bottom yet there isn’t much farther to fall. Unfortunately, it appears it is going to take as long or longer to climb out of this economic hole, than it did to fall into it.

“Without further government cash injections into the banking system, tight lending standards could characterize the economy and mortgage lending through mid-2011, dragging down home sales,” Sullivan said. “Under such a scenario, the housing recovery and overall economic recovery could be delayed significantly.”

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Government Intervention In Housing: Pros and Cons

phillenbrand — Mon, 06 Apr 2009 19:16:39 +0000

Ask the average person what they think of the government intervening in the mortgage market on behalf of consumers (and in many cases lenders, too), and you could receive a wide ranging number of answers. Many people are upset at the seemingly rampant spending of taxpayer dollars, and voice concerns (a valid one) about the future value and stability of our currency. On the other side there are those that are happy to see the little guy get some assistance during hard economic times. Recent programs have gone a long way in providing assistance to new and existing homeowners alike, but the real question is, ultimately, what will the cost of such help be, and who will take on the burden of paying those costs?

One advantage for homeowners is that rates are incredibly low, and so they’re scrambling to take advantage. It may or may not be worth it to go ahead and try to get a better loan in this market, but the Obama administration has a fix in mind. The new program, which begins as of this month, will allow borrowers whose loans are owned by Freddie or Fannie to be able to refinance for up to 105% of a home’s value. Credit scores, which have thus far prevented many from obtaining refinancing, may not be such a huge hurdle, as refis are an available opportunity for those with credit scores that are as low as 620. It makes me uneasy hearing that (isn’t lending to troubled borrowers what got us here in the first place?) but it isn’t exactly a free lunch. You’ll need to be current on your mortgage, and you’ll also need a solid payment history. Full details can be found at Makinghomeaffordable.gov.

Now yes, this does provide tangible benefits to the average consumers, even to those that aren’t drowning with an underwater house or bit off more than they could chew, but let’s look at the cost. At present, the Federal Reserve is buying hundreds of billions of dollars in these low interest mortgages. Present tab is running $250 billion, but expect that number to grow as time goes on, up to $1.25 trillion.

Running the printing press to pick up these mortgages has problems in and of itself. Inflation (weren’t we just worried about deflation?) is a real risk here. In addition, these buys tip the mortgage purchases balance on the Fed’s balance sheet, which in total could run up to 20% of the country’s GDP. Once Uncle Sam bows out of the buying spree, it seems likely that mortgage rates could rise sharply once again. The question then becomes when exactly should the Fed get out, before investors come to assume that the government will step in if problems arise again in the future.

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