More ammo for the bazooka

December 30, 2009

Treasury has reloaded its bazooka and stands ready to shock and awe the housing market.

Though, Standard & Poor’s/Case-Shiller data showed a fifth month of improvement yesterday, analysts still expect prices to fall 10 percent or more next year as various government supports wind down.

Political pressure ahead of midterm elections will likely force the administration to do something in response and Treasury’s Christmas gift of nearly unlimited support for Fannie Mae and Freddie Mac gives them a powerful weapon to do so.

But it will be a tough fight as artificial, government-sponsored demand dries up.

The housing tax credit — $8,000 for first-time buyers, $6,500 for move-up buyers — ends in April. Meanwhile, the Federal Housing Administration plans to tighten its loose lending standards as its reserve fund has dwindled.

Moreover, mortgage rates may head higher as the government ends purchases of mortgage-backed securities. Treasury’s $220 billion buyback program ends this week. The Federal Reserve’s $1.25 trillion program ceases in March.

And then there’s the continuing flood of Treasuries to finance the federal deficit. Morgan Stanley estimates that could drive 30-year mortgage rates back above 7.5 percent, an effective 40 percent increase in the cost of financing home purchases. That looks high, but even a smaller jump will drive buyers from the market and force house prices down.

But the biggest threat may be foreclosures. Credit Suisse expects 4.2 million next year and says that 3.2 million must be prevented to keep prices stable. That’s a tall order, considering unimpressive results from modification efforts that mostly focused on extending terms or lowering interest payments.

Banks, mortgage bond investors and servicers are loath to go further, by forgiving principal, because it’s either a direct hit to capital or tricky to do under current bond documents. Extend and pretend is less painful.

Enter Fannie and Freddie. With unlimited support from Treasury the two have theoretically unlimited capacity to eat losses, useful to Treasury if it wants to finance an expanded modification program that includes principal forgiveness.

It’s a tempting weapon to deploy ahead of midterm elections. But financing principal writedowns with taxpayer money only adds to America’s debt burden while rewarding irresponsible borrowers and lenders.

Comments

Let’s not forget the never ending tsunami of funding that GMAC seems to get.

Posted by Andrew | Report as abusive
 

Why bother giving hundreds of billions to banks, via GSE refi, as incentive so they forgive principal balances if the homedebtor has no job/income to pay the new (lower) balance? It’s beyond obvious that this won’t be limited to employed debtors.

Posted by million | Report as abusive
 

I saw the other day that about 5% of Fannie’s mortgages are “seriously” delinquent–three months behind or worse. What is the value of this subsidy to the consumer? Roughly 1/3 of households don’t have a mortgage, so assuming 80 million households in the US, this means that about 2.5 million households aren’t paying their mortgages. Let’s assume that this is about $1000/ month on average (I hate complicated math, lol), then the subsidy to the economy from Fannie and Freddie and FHA (let’s assume that the federal government in one form or another is guaranteeing the interest payments on the mortgages) is about $2.5 billion per month, or about $30 billion per year.

Not that much in the overall scheme of things, I suppose. How’s the math look? Is it worth $30 billion per year to keep 5-10 million Americans in their current homes–and not voting for change. . .

Posted by But What do I Know? | Report as abusive
 

This is actually good, as it will allow prices to come down. Banks can’t sell homes for less unless someone gives them money for their losses on principal and interest.

Know this: when you see a list price on a house, forget about haggling over 10%.

Take 30% off the price and offer that. Banks have it covered by Fannie and Fredie and they will deal. This is of course if you have enough cash for at least 20% down.

Which unfortunately most people don’t. So only people with cash on hand will be able to get nice homes at steal prices.

aloha

Posted by Mike OC | Report as abusive
 

If we need to stop 3.2M of 4.2M foreclosures, then Frandie doesn’t hold enough of the paper to do this. If hiding losses is the reason mortgage holders are holding out, then they are unlikely to sell the mortgages to the government at a loss.

Looks like its $1T of additional window dressing.

Posted by bob goodwin | Report as abusive
 

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