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April 2008 Housing Market Commentary
by Peter L. Zachary, MAI, MRICS

If you recall, my first commentary on 09/10/07 talked about the loss of jobs in the mortgage industry. In that commentary I quoted the New York Times, which said that 4,000 jobs were lost from the mortgage industry from July 2007 to August 2007. The April 5, 2008 issue in the New York Times now reports that 80,000 jobs were lost in March from all industries, not just the mortgage industry. They state: "The March decline was the largest job loss since March 2003 when the economy was still shaking off the lingering effects of the 2001 recession. Since the start of the year, 232,000 jobs have disappeared, the Bureau of Labor Statistics said yesterday." The Times continues: "More than once in the past, three consecutive months of job losses have marked the start of a recession." "It is our view that we already are in one", said Drew Matus, a Lehman Brothers economist, offering a view widely held by Wall Street. "The job loss numbers strengthen the case that we are in a recession," said Edward McKelvey, senior United States economist at Goldman Sacks.

On March 3, 2008, the NY Times reported that the Bush Administration announced a plan to delay foreclosures for some homeowners for 30 days and Hillary Clinton called for a 90-day moratorium on foreclosures. In New York State two state legislators have proposed legislation that would delay foreclosures throughout the state for one year. According to the Times, "The bill is one of the most far reaching state proposals to address the crisis in sub-prime lending and foreclosures, and it recalls the long term foreclosure moratorium that provided relief to homeowners in the 1930ís during the Great Depression." The Times continues: "New Yorkís one-year moratorium, if passed, would not take effect on a case by case basis, it would be mandatory for court-ordered foreclosures. It would impose a one-year delay from the time the court order allows the foreclosure to proceed.

This may sound like some sort of relief but by the time this legislation passes the State Legislature, many homes will be lost to foreclosure.

The next day, March 4, 2008, the Times reported that: "mortgage companies are showing more willingness to relax the loan terms for sub-prime borrowers who are in danger of losing their homes". The Times continues that: "of about 6 million people who have sub-prime mortgages, about 16.7% are behind in their payments and 6.8% are in foreclosure".

On April 3, 2008, the NY Times reported that Senate Democrats and Republicans reached a tentative deal on a package of Legislations to help homeowners facing foreclosure, including new tax breaks intended to help stabilize the wider housing market. The Times article continues:

"The bill, which is expected to go to the Senate floor on Thursday, includes a new standard property tax deduction of $1,000 for couples and $500 for individuals that will benefit 28.3 million tax filers who do not itemize deductions on their annual returns.

The bill also includes $100 billion in tax-exempt bonds for local housing agencies to refinance sub-prime loan and provide new mortgages for first-time homebuyers, $4 billion in grants for local governments to buy foreclosed properties and $100 million to expand counseling for homeowners at risk of defaulting on their loans.

In addition, it would give a $7,000 tax credit to purchasers of foreclosed homes and would provide a new tax break for struggling home builders, allowing them to claim current losses against taxes paid in earlier, more profitable years. Officials said the proposals would cost taxpayers $15 billion to $20 billion, with details still being worked out."

The Times further states that "Senate Republicans, in particular, had felt compelled to move housing legislation quickly after the Federal Reserveís intervention to avert the collapse of Bear Stearns." The Federal Reserve engineered the 03/34/08 buyout of and guaranteed approximately $29,000,000,000 of Bearís bad loans.

Senator Harry Reid, the majority leader, said staff members had worked through the night to put it together. "I think this is good news for the American people," he said. "And Iím confident that we can process this fairly rapidly."

Mr. Shelby, too, said Americans should be heartened. "We are going to work in a bipartisan way to tell the American people that we have heard from you."

On April 6, 2008, the NY Times reports that Nanny Pelosi and other democrats in the House of Representatives are expected to offer their own plan to "aid as many as 1.5 million homeowners by expanding the availability of federally insured loans." The Times continues: "The Democratic plan, developed by the House Financial Service Committee, would make available up to $300 billion in federally insured loans to help troubled owners to refinance risky adjustable-rate mortgages into more affordable 30-year fixed rate loans at an upfront cost to taxpayers of $10 billion. The proposal hinges on persuading lenders to take substantial losses on mortgages written during the boom that now exceed the value of the homes. Qualified lenders would then make new loans insured by the Federal Housing Administration."

The Times states that: "The Democratic plan seeks to avoid helping speculators who made risky investments as well as irresponsible home buyers who could never afford to pay off their loans." The Times states that this program would help homeowners keep only the home they live in, not vacation or investment property. Continuing, the Times states: "Borrowers would have to meet stringent criteria, showing their ability to pay a new loan. They would also have to pay insurance premiums to the FHA, reducing the risk to taxpayers of any defaults. And if the home was sold, the government would get a share of the profit." This article in the Times talks about the supporters and critics of this plan and concludes: "During the 1930s, when the government set up the Home Owners Loan Corporation to buy and modify defaulted loans, the agency ended up foreclosing on 20 percent of its borrowers, said Alex J. Pollock, a fellow at the American Enterprise Institute. He said any new plan should be set up to withstand losses on a sizable number of loans. Mr. Frank said his proposal would do that by charging relatively high insurance fees, giving the FHA a large cushion."

"The fresh F.H.A. loans will be less risky than many existing loans "because they will be smaller and at lower interest rates, but they will still be risky loans," said Mr. Pollock, who has called for an agency similar to the loan corporation of the Ď30s. "There will be re-defaults, and there will be losses."

It looks like the Cavalry has arrived to federalize the mortgage industry. After all is said and done, the mortgage securitization business in the future will no longer exist. Investors will not invest in mortgages when the government is going to force them to accept losses. And besides, Wall Street had already fired everyone in the mortgage business. More to come next month.

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