Commentary on the Real Estate and Housing Market as of 06/04/08
by Peter L. Zachary, MAI, MRICS
The federalization of the mortgage industry may be close at hand. The May 20, 2008 business section of the New York Times stated that Senate leaders have reached a deal in housing assistance. "The Senate bill would create an affordable housing fund, financed by the government-sponsored lenders, Fannie Mae and Freddie Mac, and that fund would be used in its first year to provide about $500 million for the foreclosure rescue effort. The Times reports that the House approved a similar foreclosure rescue bill. It states "under both the House and Senate plans, lenders could limit their losses from potential foreclosures by agreeing to reduce the principal balances of loans at risk. The borrowers, many with expensive adjustable rate loans, would then apply (to Fannie Mae and Freddie Mac) to refinance with a more stable, 30 year, fixed-rate mortgage insured by the government through the Federal Housing Administration (FHA). The Times stated that the Congressional Budget Office has estimated under the House bill, up to 500,000 mortgages would be refinanced over the next five years, at a cost to taxpayers of about $2.7 billion.
The House and Senate have to agree upon a bill that the President would either sign or veto. The Times reports that the White House stated: "We look forward to seeing the details of the bill especially provisions to expand programs of the Federal Housing Administration".
The Times reported in their business section on May 10, 2008 that "Mortgage Holders Find it Hard to Walk Away From Their Homes". The article stated at an estimated 9 million American households, or 10.3% of all single family homes, owe more than their home is worth, according to MoodysEconomy.com. By comparison, 4.8% of home loans are in foreclosure or delinquent by 60 days or more at the end of last year, according to the Mortgage Bankers Association. The reasons for this willingness to "tough it out" is the bad credit that a homeowner will have if they walk away from their home and the lenders legal remedies to obtain deficiency judgments which allow lenders to recoup the difference between what is owned on the debt and what the property is sold for after foreclosure. The article states that Fannie Mae increased the time it takes to apply for a mortgage after a foreclosure to 5 years from 4 years. The Times states that Treasury Secretary Henry M. Paulson Jr. said "Let me emphasize that any homeowner who can afford his mortgage payment but chooses to walk-away from an underwater property is simply a speculator." The Times article also states that when people suffer a job loss or death of the primary earner, the borrower has no choice but to let the house go into foreclosure. The Times quotes Jon Madux, founder of the site YouWalkAway.com, which helps borrowers leave their homes, said that a majority of the site's client defaults because of financial hardships. But in the southwest and Florida, more of its customers are investors who bought multiple condos or houses and are not now able to find renters or sell for more than they owe. They further quote Peter Chinloy, a real estate and finance professor at American University in Washington who has studied how borrowers behave when home prices fall, who said policy makers should recognize that the problems are most severe in a few states in the Southwest, the Midwest, and Florida and should aim relief in those areas. It is also most severe for loans made between 2005 to 2007, when credit was at its easiest. Mr. Chinloy concludes "one of the things that has not gotten much attention is how localized the problem is.
The Bank of America purchase of Countrywide Financial Corp may be in trouble. The $4.1 billion purchase price may be too excessive given that Countrywide's stock is now $5.36, almost 24% lower than the $7 price that Bank of America offered. The New York Times on May 6, 2008 stated in their Business section that since the Chairman of Bank of America, Mr. Kenneth D. Lewis, announced the acquisition, the problems at Countrywide have intensified.
The Times quotes, Paul J. Miller, Jr., a mortgage industry analyst at Friedman, Billings, Ramsey and Company. Mr. Miller said "Bank of America should completely walk away from the Countrywide deal, as Countrywide's loan portfolio will continue to be a drag on earnings and force Bank of America to raise additional capital. Another analyst, Charles Peabody, at Port Ales Partners, said the deal puts Bank of America between a rock and a hard place and puts a sell rating on its stock. "Either the deal goes through and Bank of America faces significant charges, or the deal fails and Bank of America faces a significant write-down on the $2 billion preferred investment in Countrywide.
As you may remember, Bank of America initially made a $2 billion preferred loan to Countrywide and shortly thereafter agreed to buy the entire firm for $4.1 billion. Mr. Miller thinks that instead of walking away, Bank of America will try to renegotiate a deal for as little as $2 per share. This is because Countrywide's losses have risen sharply since the Bank of America made its initial $2 billion investment last summer. Last fall, Mr. Peabody estimated that Countrywide's losses might total $9 billion or $10 billion. Now, as real estate values continue to plummet, they may reach $16 billion or more.
Confirming real estate woes, the May 28, 2008 issue of the New York Times stated that two reports on housing capture a bleak picture. "One (Standard and Poor's Case – Shiller Index) showed that home prices nationally fell 14.1% in March from a year earlier. The other (Commerce Department) showed sales of new homes, although up slightly in April, remain mired near their lowest levels." While Wall Street is growing hopeful that the economy may dodge a recession, many economists warn that the pain in the housing market may last for several years. The Times continues, "From their peak, prices have already fallen 16%, more than half the way to the 25% drop that the economists at Lehman Brothers expected."
The following is a chart from S&P/Case-Shiller index which appeared in the Wall Street Journal website on May 27, 2008. It indicates home price changes in 20 different cities.
Source:Standard & Poor's and FiservData
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