Five Tipping Points for 2009
If Rip Van Winkle went to sleep three years ago and awoke today, he would have a hard time recognizing the seismic changes that have taken place in real estate. Perhaps the most unexpected and also most important is the unprecedented power the Federal government exerts today over the housing markets.
We’re not so brave (or foolish!) as to predict how the Federal presence will manifest itself during the next 12 months, but we will be watching certain points of friction--tipping points if you will--where decisions made in Washington will have an extraordinary impact on real estate, creating both challenges and opportunities for those who are paying attention. Here are five you might watch closely in the new year.
1. Fateful Rates. It’s axiomatic that interest rates move the real estate market-- the lower they go the better for buyers and sellers alike. In 2009, however, interest rates will be more critical than ever because if they stay low enough, they will do double duty. First, they might put a little life into sickly home sales by encouraging chary buyers to act now or lose out when rates rise. Second, they’ll make it easier for homeowners to refinance into a more affordable 30-year fixed rate loan, especially those holding Alt-A and Option ARM loans that are due to reset.
Sixty Minutes raised alarms in Washington with a scary piece on December 14. The segment described a pending tsunami of Option ARMS and Alt-A resets, basing their piece largely on the widely cited Credit Suisse research that estimates some $1.8 trillion Alt-As and Option ARMs will reset in the next few years. What the CBS report failed to mention is that low interest rates will take the sting out of resets, for both borrowers and real estate markets already awash in foreclosures.
As the government stumbles along with foreclosure program failures like Hope for Homeowners, lower interest rates are the only solution that works for borrowers, lenders and taxpayers.
Keeping rates at record lows may not be a difficult assignment for Bernanke’s Fed during this moribund economy. In any case, with both the economy and the financial fortunes of the Federal government increasingly dependent on the value of residential real estate, the Fed will have no shortage of motives to do so.
2. Investor Backlash Gets Serious. It had to happen. Bank investors—slong silent sufferers in the foreclosure crisis—have decided not to go quietly into the night. A potential class action suit to stop the modification of troubled loans originally underwritten by Countrywide and now owned by Bank of America was filed in the New York State Supreme Court in December, and it may be the first of many.
The lawsuit is further proof of how complicated it will be to restore the real estate markets to health. A web of investors, securitizers and second-mortgage lenders holds stakes in most every mortgage. If successful, the suit could lead to a raft of investor litigation drive borrowers deeper into trouble until they have no choice but default. It could also keep lenders away from voluntary participation in government solutions like Hope for Homeowners where participation could mean significant losses and make future government fixes even more difficult.
The New York suit challenges an $8.4 billion settlement negotiated by Bank of America and the State of North Carolina and other states that alleged Countrywide had practiced predatory lending. A self-styled investor advocate named William Frey argues that most of Countrywide’s loans are not Countrywide's or Bank of America's to modify, but rather are owned by trusts that bought them through securitization. He says:
The lawsuit, which seeks class action status, covers 374 Countrywide securitizations. will short bondholders by reducing borrower payments. While those loan adjustments may help to keep struggling borrowers in their homes today, Frey says those alterations run the risk of permanently damaging the secondary market.
“Modifications may indeed be a great idea. The only question here is who is going to pay for it,” says Frey’s attorney. “And our position is that bondholders are not going to pay for these modifications. Countrywide needs to pay for them.”
If Frey wins, litigation may become infectious. Frey’s attorney estimates that 385 trusts, representing hundreds of investors and outstanding debt originally worth $465 billion, could be eligible to participate in a class action lawsuit. In addition to the securities investors, other parties—like lenders that make second-mortgage loans or home equity loans and often get left in the cold in a loan workout since they’re second in line to collect payments from a homeowner—may join the party.
3. Fix Housing First? “Fix Housing First” is the housing industry’s battle cry in Washington. It’s also the name of a new coalition spearheaded by the National Association of Home Builders that is pushing a round of new tax credits to lure buyers back into the market place along with lower mortgage rates subsidized by the Federal government.
For a variety of reasons it’s hard to disagree with the notion that reviving the real estate industry is in the national interest, not the least of which is that, with the takeover of Fannie and Freddie, the Federal taxpayers are more exposed than anyone else. Aside from their political clout, it’s hard to understand why other hurting industries like the auto industry should be allowed to butt into line ahead of housing.
Housing first solutions are no longer housing-only solutions like those tried last uear. Housing-only solutions didn’t work. Tax credits for first-time home buyers didn’t do a thing for sales, though the home builders argue they weren’t large enough nor very useful and should be restructured to help buyers with down payments.
In final analysis, the market may make the only decision that counts. Survey after survey of buyers echoes what street Realtors already know. Today it’s all about confidence in the economy, and not many buyers are paying attention to incentives to purchase whether they are tax credits or bargain prices. Buyers are worried about their jobs, their 401Ks and their savings. They’ll put off that second home, that larger home or that first home until they feel safer. The reality is health won’t return to the housing sector until confidence is restored.
4. The Barney and Timothy Show: Amity or Antagonism? We’ll miss the entertaining dueling between Barney Frank, chair of the House Financial Services Committee, and Treasury Secretary Hank Paulson when Paulson turns over his office to Timothy Geithner in January.
Last year Frank emerged as a powerful advocate for using TARP money to stem foreclosures, a policy Paulson bitterly opposed. President-elect Obama has promised repeatedly that the foreclosure crisis will be at the top of his agenda, but students of Geithner’s bio are wondering whether there will be much of a real difference when it comes to policies.
For one thing, Geithner’s education, his career path and his own interests have seldom touched the business of mortgage finance and the Federal regulatory structure that governs it. Only lately, in the context of the subprime crisis, has he spoken out about what he sees as systemic flaws in the system.
For another, he doesn’t see the current crisis as a housing crisis but a financial and regulatory one that started in the housing industry. He sees the core problem as the emergence of a parallel financial system of lending institutions unregulated by banking laws. Their risky and relatively illiquid assets were financed by very short-term liabilities that made them to a classic run like the one we experienced in 2008. His answer is better and more universal regulation of financial services institutions.
Can Geithner turn over a new leaf with Frank, carry out his President’s dictates, and maintain the powerbase and priorities Paulson created? Stay tuned. New bailout legislation will be on the Congressional agenda once the Inaugural parties end.
5. Future of Freddie and Fannie. By the end of this year, if not sooner, we should know whether Freddie Mac and Fannie Mae will become wholly owned subsidiaries of the Treasury Department or destined for re-privatization.
In the waning hours of the Bush Administration, they resemble the former more than the latter. Most recently, Treasury forced them to take huge losses by turning them into the Bush Administration’s two primary vehicles to mitigate foreclosures. Fannie and Freddie have been buying up mortgages in the marketplace and issuing securities, which helps to keep the conventional conforming market liquid and mortgage rates low, and modifying the hundreds of thousands of delinquent mortgages that they own.
Re-creating these organizations may be more difficult than creating them in the first place. Political constituencies will weigh in on every decision. Old habits may be hard to beat and despite all that has happened, change will not come easily. However, they will never be allowed to return to their former autonomous lives when they were regulated by OFHEO. Few decisions will be more important for housing than the long-term fate of the housing GSEs.
(This article first appeared in the January 6, 2009 issue of the Reecon Advisory Report.
The Reecon Advisory Report is an independent source of news, insight and actionable intelligence on the real estate economics that are shaping residential property markets. The Reecon Advisory Report is published weekly by Reecon Advisors, Inc. It is available by subscription at Reecon Advisory Report. For a free one-month trial subscription, send an email with you address to email@example.com. Copyright © 2008 by Reecon Advisors, Inc. All rights reserved.)
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