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The Fed’s Report Card in Real Estate

“Alas, all the Fed’s purchases and all the government’s men can’t put the residential real estate market together again.”

– from a column by Caroline Baum in Business Week

In yesterday’s blog, I covered the reasons the administration’s new modification program could make sense. Today, I want to look at the other side of the argument and discuss, in general terms, whether modification programs and other government sponsored stimuli actually have helped the housing industry.

The Homebuyers’ Tax Credit

THE GOAL: The purpose of the Tax Credit was never for the sake of the buyer. Increasing homeownership is not necessarily a goal of this administration. Their goal was to stabilize home prices. As the Fed reported in their TARP report in January:

Supporting home prices is an explicit policy goal of the Government … All of these actions increase the demand for homes, which increases home prices.

THE RESULT: Though prices stabilized this winter there is a question as to why. Was it the tax credit, or was it the fact that fewer foreclosed properties came to the market? Foreclosures obviously sell at a discounted price. The less there were, the higher the average sales price.

In either case, prices are again beginning to soften. Will the tax credit have no long term impact? Was it worth it if there is no long term affect?

THE GRADE: C –

The House Affordable Modification Program (HAMP)

THE GOAL: According to the original press release:

On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan to help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. As part of this plan, the Treasury Department (Treasury) announced a national modification program aimed at helping 3 to 4 million at-risk homeowners – both those who are in default and those who are at imminent risk of default – by reducing monthly payments to sustainable levels.

THE RESULT: A year later, the numbers are in and they are not good. According to the latest Making Home Affordable Program’s Servicer Performance Report:

More than 170,000 permanent modifications have been granted to homeowners, who are guaranteed lower payments for five years.

170,000 is a long way from 3-4 million.

In addition, the Office of the Comptroller of the Currency Office of Thrift Supervision in their latest report showed that over 50% of modifications started re-defaulted after 9 months.

The reason this is important is because new data out suggest that the modification program might have actually caused people to strategically default instead of paying their mortgage. Reuters reported on a study by Amherst Securities, which shows that people:

…are intentionally defaulting to take advantage of the [HAMP] modification program. Or at least to take advantage of extra time living in the house rent free, courtesy of the modification program.

The program so far has helped 170,000 families avoid foreclosure. How many famililies did it help strategically default?

THE GRADE: F

The Purchase of Mortgage-Backed-Securities (MBS)

THE GOAL: The reason for the FED’s MBS purchasing program was to keep interest rates down to maintain and perhaps increase demand for housing. The goal was again to stabilize prices to avoid additional increases in negative equity. Again, we can quote the TARP report:

The Government has done more than simply support the mortgage market, in many ways it has become the mortgage market… All of these actions increase the demand for homes, which increases home prices. In addition to direct Government activity, home prices can be lifted by general expectations among homebuyers of future price increases.

And here is a graph directly from the report showing the connection:

THE RESULT: Though the lower interest rates did impact the market very favorably, the questions concerning continued stabilization in pricing still persist. And what will happen when the FED exits the market this week?

THE GRADE: INCOMPLETE

What does this mean to you?

The administration is starting new programs to try to contain the number of foreclosures coming to market. Though I believe they probably deserve a good grade for effort, the true test will be in the results. So far the grades have been spotty.


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