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Commentary on the Real Estate Market - September 2009
by Peter L. Zachary, MAI, MRICS

Last month I reported on mortgage servicers and how the government wanted them to do more to modify home loans and prevent foreclosures. On Wednesday, August 5, 2009, on the 8th page of the Business Day section, there was an article, "US Effort Aids only 9% of Eligible Homeowners". That same day the New York Post had an article on its business page, "Hall of Shame – Treasury Rips Banks for Not Helping Homeowners". The New York Times reported, "The Treasury Department said on Tuesday that only a small number of homeowners – 235,247, or 9 percent of those eligible – had been helped by the latest government program created to modify home loans and prevent foreclosures. A report released by Treasury officials identified lenders who had made slow progress in offering more affordable mortgages, naming Bank of America and Wells Fargo as among those failing to reach large numbers of eligible borrowers. While 15 percent of eligible homeowners have been offered help through the mortgage modification program, the low rate of actual mortgage reductions has frustrated administration officials. Michael S. Barr, the assistant secretary for financial institutions, said in a news conference that there were 'significant variations' in performance and that some institutions had made 'an infinitesimally small amount' of progress. 'I think it's safe to say we're disappointed in the performance of some of the servicers,' Mr. Barr said. 'We expect them to do more.'

The Times article continues: 'The release of data showing the progress of individual institutions is part of a Treasury effort to push banks to modify loans faster. Under the $75 billion program, homeowners whose monthly mortgage payments are more than 31 percent of their gross income are eligible for modified loans, with interest rates as low as 2 percent. Bank of America has modified only 4 percent of the eligible mortgages, and Wells Fargo has modified 6 percent. Citimortgage, a unit of Citigroup, fared better at 15 percent, while JPMorgan Chase was among the most successful, modifying loans for 20 percent of eligible borrowers. All four institutions received federal bailout money.'

'Since President Obama announced the mortgage modification program in February, mortgage holders have criticized the slow response by lenders. The Treasury Department hopes to reach as many as four million borrowers through the program in the next three years. Mr. Barr said he expected institutions to modify 500,000 loans through the program by November. 'We're going to pay specific attention to making sure that the institutions that have been slow out of the block ramp up more quickly and more effectively,' he said. Treasury Secretary Timothy F. Geithner met on July 28 with lenders who had signed agreements to participate and asked them to streamline the application process and improve customer service. 'For us the bottom line is, they need to reach the borrowers,' Mr. Barr said. 'For some of them that means better training, for some of them that means ramping up capacity, for some of them that means treating people better in their call centers.' The Treasury Department hopes the name-and-shame tactic will encourage banks to improve. In addition, Freddie Mac, the government-controlled mortgage buyer, will audit rejected applications. Wells Fargo and Bank of America issued statements on Tuesday promising to comply with the program."

In my opinion, no Federal intervention, it used to be called "Jawboning", will turn a profit oriented bank into an altruistic institution to help people. The government's stimulus plans have had a limited effect.

On Friday, August 7, 2009, the front page of the times had an article, "Economists See a Limited Boost from Stimulus". The Times article states: "Even as the Obama administration braces for another grim report about job losses on Friday, economists say that the president's $787 billion stimulus package has helped blunt the downturn in limited but discernible ways. A report card on the stimulus plan offered by analysts nearly six months after it was passed by Congress suggests that the punch from increased government spending has helped the economy begin to bottom out faster than it would have otherwise. The tax cuts included in the plan, economists said, have had less of an impact because people tended to save the money or use it to pay down debt rather than spent it. The effectiveness of the stimulus package has emerged as one of the most pressing concerns facing the White House. The government will release a jobs report on Friday that is expected to show that the unemployment rate ticked up in July from 9.5 percent in June, providing Republicans and conservative economists new ammunition to argue that the stimulus has been a waste of taxpayer money. While there is a consensus that a fragile recovery is in the offing, the outlook remains murky. Still, analysts say the impact of the stimulus, while small, is discernible. White House officials estimate that the stimulus program pumped about $100 billion into the economy through June. That was only a small share of the total projected spending, and much of the first wave came in the form of tax cuts, tax rebates and higher spending on safety-net programs like unemployment benefits and health care. Private analysts say they think it added at least 1 percentage point to economic growth in the second quarter. That was not enough to prevent the economy from shrinking and joblessness from rising, but the pace of the decline slowed substantially compared with the first quarter. 'The signs of the stimulus are there,' said Allen L. Sinai, chief economist at Decision Economics, a forecasting firm in New York. 'Government – federal, state and local – is helping take the economy from recession to recovery. I think it's the primary contributor.' But even supporters of the stimulus program say its contribution to a recovery so far has been smaller than White House officials estimated.'

And on August 8, 2009, The Times reported "Job Losses Slow, Signaling Momentum for a Recovery – Unemployment Rate Falls to 9.4%, But Some Have Stopped Seeking Work". The Times article stated: "The most heartening employment report since last summer suggested on Friday that a recovery was under way and perhaps gathering steam - despite the reluctance of the nation's businesses to resume hiring or even stop shedding jobs. Employers eliminated 247,000 jobs in July, a huge number by the standards of an ordinary recession, but the smallest monthly loss since last August, the Bureau of Labor Statistics reported. And the unemployment rate, rising for months, actually ticked down, to 9.4 percent from 9.5 percent in June, mainly because so many people dropped out of the hunt for work, ceasing to list themselves as unemployed. "Employers are no longer in a panic," said Ian C. Shepherdson, chief domestic economist for High Frequency Economics. "The pressure they felt to get rid of workers in a hurry is diminishing. What we don't see yet is enough momentum in the economy to convince companies to hire again." Obama administration officials credited the stimulus package, enacted in February, for the continuing improvement, from a peak of 741,000 jobs lost in January. Some said the July loss would have been closer to 500,000 without the American Recovery and Reinvestment Act. The president, appearing briefly in the White House Rose Garden, said his administration had "rescued our economy from catastrophe." Just a week earlier, the government announced another significant improvement - the overall economy contracted at an annual rate of only 1 percent in the spring quarter, vastly better than the fall and winter months. The two reports have convinced many forecasters that when the history of the Great Recession is written, these summer months will be the big turning point, when the economy started to grow again. "The labor market, like the overall economy, is beginning to stabilize, with the expectation that job losses will approach zero by the end of the year," said Chris Varvares, president of Macroeconomic Advisers, who expects the unemployment rate to peak at less than 10 percent. After months of painful job losses, the Obama administration was clearly relieved at the brightening picture. The president, his advisers and administration economists pointed to their actions to stimulate the economy. Only $100 billion of the $787 billion package has filtered into the economy so far, with much of the remainder to be spent next year. "The fingerprints of the Recovery Act are all over this data;' said Jared Bernstein, the chief economist for Vice President Joseph R. Biden Jr. "Were it not for the economic activity generated by the act; we would have lost hundreds of thousands more jobs last month." The stimulus is crucial, Mr. Shepherdson said. "If it were to stop, the economy would grind to a halt. There is no momentum from consumer spending or business investment".

And on Saturday, August 29, 2009, the front page of the New York Times said "Consumer Thrift on US may Last after Recession – Unease about Future-Persistent Weakness Is Seen in a Mainstream of The Economy". "Even as evidence mounts that the Great Recession has finally released its chokehold on the American economy, experts worry that the recovery may be weak, stymied by consumers' reluctance to spend. Given that consumer spending has in recent years accounted for 70 percent of the nation's economic activity, a marginal shrinking could significantly depress demand for goods and services, discouraging businesses from 'hiring more workers. Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the where-withal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and a real estate prices, "We're at an inflection point with respect to the American consumer," said Mark Zandi, chief economist at Moody's, who correctly forecasted a dip in spending heading into the recession, and who provided data supporting sustained weakness." "Lower-income households can't borrow, and higher-income households no longer feel wealthy," Mr. Zandi added. "There's still a lot of debt out there: It throws' a pall over the potential for a strong recovery. The economy is going to struggle. Some suggest the recession has endured so long and spread pain so broadly that it has seeped into the culture, downgrading, expectations, clouding assumptions about the future and eroding the impulse to buy. The Great Depression imbued American life with an enduring spirit of thrift. The current recession has perhaps proven wrenching enough to alter consumer tastes, putting value in vogue. "It's simply less fun pulling up to the stoplight in a Hummer than it used to be," said Robert Barbera, chief economist at the research and trading firm ITG. - "It's a change in norms." Here in Austin, a laid-back city on the banks of the Colorado River, change is palpable.

"For years, Americans have tapped stock portfolios and borrowed against homes to fill wardrobes with clothes, garages with cars and living rooms with furniture and electronics. But stock markets have proven volatile. Home values are sharply lower. Banks remain reluctant to lend in the aftermath of a global financial crisis. Households must increasingly depend upon paychecks to finance spending, a reality that seems likely to curb consumption: Unemployment stands at 9.4 percent and is expected to climb higher. Working hours have been slashed even for those with jobs. Economists subscribe to a so, called wealth effect: as households amass wealth, they tend to expand their spending over the following year, typically by 3 to 5 percent of the increase. Between 2003 and 2007 - prime years of the housing boom - the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody's Now, the wealth effect is working in reverse: by the first three months of this year, household net worth had dropped to $421,000. "Not only have people lost money, but they don't expect as much appreciation in the money they have, and that should affect consumption," said Andrew Tilton, an economist at Goldman Sachs. "This is a cultural shift going-on. People will save more."

America has always been a nation of savers, except in the past several years. Maybe we are going back to our roots. In 20 years we may be able to buy back the treasury obligations owned by the Chinese.

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