For Bailout to Work, Housing Market Needs to Mend

An end to falling home prices is the most important thing that needs to happen for the $700 billion bailout to work, according to experts. The problem is that the lending freeze has made getting a mortgage loan tough for everyone except those with sterling credit. That means it will take several months or longer to pare down the housing inventory, including properties that have come on the market because of foreclosures, before home prices start appreciating. A turnaround in housing prices would boost confidence in the wider economy and, experts hope, goad banks into lending again. “Banks know the economy is getting worse, so…they will keep being cautious,” said Sung Won Sohn, an economics professor at California State University, Channel Islands and a former banking executive. Still, the government hopes that by scooping up billions of dollars in bad mortgage debt and other toxic assets, banks eventually can clean up their shaky balance sheets, crack open the vaults and send money washing through the system again. Rep. Barney Frank (D-Mass.), the Financial Services Committee chairman and a key negotiator over the past weeks on the emergency rescue bill, said the measure was just the beginning of a much larger task Congress will tackle next year: overhauling housing policy and financial regulation in a legislative effort comparable to the New Deal. (www.businessweek.com)
BusinessWeek (10/5/08); Stevenson Jacobs, Associated Press

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With Bailout Approved, What’s Next?

The bill to stabilize the financial markets enacted on Oct. 3 gives the Treasury Department broad running room to start buying $250 billion of illiquid assets immediately from banks and other companies so long as it consults with the federal banking agencies and HUD. It can ask the President to release an additional $350 billion without any further congressional action. Lawrence E. Platt, a lawyer at K&L Gates, said that the Treasury must better define eligible types of institutions, troubled assets and asset managers but that, most importantly, it must decide “where they first should deploy capital.” The Treasury is expected within a few weeks to begin buying illiquid assets in order to send a signal to the marketplace, and will probably start buying simpler securities first. Treasury Secretary Paulson has told lawmakers that the agency can probably handle roughly $50 billion of purchases per month; it is required to issue a detailed report disclosing its purchases within seven days of spending the money. The law says that a financial stability oversight board comprised of the heads of the Securities and Exchange Commission, Federal Reserve, Federal Deposit Insurance Corp., Federal Housing Finance Agency, HUD and Treasury must meet within two weeks of the first use of purchase authority. Within 60 days, the Treasury must clarify its process for expanding foreclosure prevention efforts on the loans that underlie the securities it buys and any whole-loan purchases. This includes an explanation of how it plans to use its authority to set up loan guarantees and credit enhancements — a provision lauded by FDIC Chairman Sheila Bair as a potential way to speed up loan modifications. The Treasury is also tasked with using, and encouraging servicers to use, an FHA refinancing program that took effect on Oct. 1 to insure reduced-cost mortgages. (www.financial-planning.com)
Financial Planning (10/6/08); Stacy Kaper, American Banker

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Builder, Banker Weigh in on U.S. Bailout Package

People who believe that banks were using the bailout proposal as a scare tactic and that lenders could ultimately tap into other sources of credit and liquidity instead of borrowing from taxpayers, “should call up the former CEO of Washington Mutual or Merrill Lynch,” said Jeff Burum, who is co-principal of home builder Diversified Pacific in Rancho Cucamonga, Calif. “These organizations no longer exist because of the (dried-up) financial markets. You can’t even get an acquisition and development loan in the Inland Empire today — it doesn’t exist.” Burum called the government bailout “the most important domestic issue we’re facing right now. There will be a tremendous opportunity for our region to recover. We need credit, we need jobs and we need stabilization of our (housing) values.” He added that, “Local residents won’t know how bad it would’ve gotten if the bailout didn’t occur. It would have been like the earthquake that no one saw coming. Credit is what fuels our economy.” (www.sbsun.com)
San Bernardino Sun (10/5/08); Matt Wrye

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‘We Can See the Bottom’: Home Depot Says Housing Market Won’t Go Too Much Lower

With 60 years of data tracking how much Americans spend on building and remodeling their homes, Home Depot says it appears that the housing crisis hasn’t hit bottom yet, but the end is in sight, if Americans continue to behave as they have in the past. “We can see the bottom,” said Carol Tome, chief financial officer for the Atlanta-based company in a recent interview at the Home Depot in Lincoln Park, Ill. The home improvement chain gauges market conditions by measuring private residential investment as a percentage of gross domestic product. The rate stands at 3.5% today. That is below the 4.8% average from 1948 to 2008, but still above the 3.2% reached in the second quarter of 1982, when the country was in a severe recession. The high was 6.3% in 2005. For now, Tome said she sees consumers focused on repairing their homes rather than remodeling. To that end, Home Depot cut prices on about 1,200 items from insulation to caulk to paint last month to emphasize everyday low prices over promotions. Small arrow-shaped signs point out the rollbacks on store shelves. The retailer also introduced clinics on saving money around the house, such as how to cut energy bills. (www.istockanalyst.com)
iStockAnalyst (10/3/08); Sandra M. Jones, Chicago Tribune

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Real Estate Agent: ‘The Sky Isn’t Falling’

Real estate agent Ron Jones took with caution Friday the news that Wisconsin’s affordable-housing agency was having difficult raising money for mortgages and stopped making loans — a high-profile indication in the state of the national credit crisis. “I think it is a temporary halt,” said Jones, an agent with Keller Williams Realty in Wausau. “There are other programs out there for first-time buyers. Will it have a huge effect on the market? I don’t believe so. The sky isn’t falling.” The Wisconsin Housing and Economic Development Authority, created in 1972 to offer loans to first-time home buyers with moderate incomes, suspended the program because of an inability to sell tax-exempt revenue bonds to finance them, spokeswoman Kate Venne said. About 200 loans in the pipeline with set interest rates were not affected, she said in a telephone interview from Madison. “We have money to close.” Jones hopes the financial bailout in Congress will solve the problem and put the housing authority back on the market. “I think this is going to be a real short-lived thing,” he said. “At least I am hoping that.” (www.chicagotribune.com)
Chicago Tribune (10/3/05); Robert Imrie, Associated Press

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What the FHA Needs to Get the Job Done

With its new loan volume exploding — tripling in the past 12 months alone — the Federal Housing Administration says it needs to hire more staff and upgrade its technology to be able to handle the crush of new business, but it complains that Congress hasn’t appropriated the necessary funds — $65 million — to do the job fast enough. But the real question is whether a government agency whose market share dropped below 3% during the heyday of the subprime boom can now properly handle explosive volume rocketing it to an estimated market share of 30% this year. Mortgage industry, home builder and real estate experts worry about the possible consequences of shifting too heavy a share of the mortgage market too quickly to an agency that may be inadequately staffed or funded. “FHA is assuming the risks of a mortgage market abandoned by private investors — without the risk management tools,” said Howard Glaser, who served during the Clinton Administration as acting general counsel for HUD. “My fear is that next year at this time, we will be debating an FHA bailout.” To some mortgage lenders and loan officers, the FHA is now the main game in town. “Nothing compares with them,” said Paul Skeens, chief executive of Colonial Mortgage Group in Waldorf, Md. In 2001 and 2002, Skeens’ firm did just one-quarter of 1% of its volume in the FHA. Now it’s 60%. “The last thing we need right now, with the shape the housing market is in,” he said, “is for FHA not to function well.” (www.washingtonpost.com)
Washington Post (10/4/08); Kenneth R. Harney

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