Washington’s New Tack: Helping Home Buyers

[tricky]

December 5, 2008
Washington’s New Tack: Helping Home Buyers

By EDMUND L. ANDREWS
WASHINGTON — After pouring vast amounts of money into financial institutions of almost every type, and having little to show for it, the Bush administration and the Federal Reserve are suddenly taking a new look at ordinary homeowners.
Ben S. Bernanke, chairman of the Federal Reserve, warned on Thursday that the soaring number of foreclosures threatened the economy. He then proposed some ideas — government-engineered loan modifications, and more taxpayer money to help people refinance — to keep people in their homes.
“The public policy case for reducing preventable foreclosures does not rely solely on the desire to help people who are in trouble,” Mr. Bernanke said. “More needs to be done.”
At the Treasury Department, meanwhile, top officials continued to work on a plan to bolster the housing market by subsidizing 30-year home mortgages with rates as low as 4.5 percent — a level that home buyers have not seen since the early 1960s.
Both actions highlighted how economic policy makers have come almost full circle. Since the financial crisis began last summer, both the Fed and the Treasury had focused almost exclusively on patching up the financial system — propping up banks, Wall Street firms, money market funds and issuers of commercial debt.
But the new focus on helping individuals could create a bitter split between those who want to buy homes and those who already own them. It has already opened up a rift between the real estate industry, which wants to increase sales, and the banking industry, which wants to get out from under staggering volumes of troubled mortgages.
Under a plan that top Treasury officials are weighing, the Treasury Department would underwrite tens of billions of dollars worth of 30-year, fixed-rate mortgages at rates far lower than most Americans have ever seen.
According to Bankrate.com, the 30-year, fixed-rate mortgages fell on Thursday to 5.58 percent, down from 5.76 percent last week. The 10-year Treasury note fell to 2.55 percent late Thursday, a new low.
But the cheap mortgages would be available only for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate.
As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford. Nor would the plan offer any benefit to people who have stayed current on their mortgages and would simply be interested in taking advantage of a lower rate. As envisioned by Treasury officials, homeowners who now pay 6 percent would be watching new neighbors arrive whose monthly payments were almost one-third lower.
“At this point, our view is that such a program may do more harm than good,” said Camden R. Fine, president of the Independent Community Bankers of America, which represents about 8,000 small banks.
“You have thousands of banks that made loans and have them sitting on their books, and whose borrowers have worked their rear ends off to make the payments,” he said. “Those people are going to go to their banks and tell them their neighbor just got a 4.5 percent loan, and the banks aren’t going to be able to help them. They’re going to have extremely angry and disgruntled customers.”
But the National Association of Realtors, whose members want to bolster home sales, is lobbying hard for the idea.
“We believe that the only way to really address the housing situation is to increase sales,” said Lawrence Yun, chief economist for the association. “Home prices will not stabilize until we address the inventory problem, and the only way to bring down the inventory of houses on the market is to bring in a new set of buyers. We think this would do the trick.”
Mr. Yun estimated that a one-year program to provide home buyers with an interest rate of 4.5 percent would cost the government about $50 billion. It would result, he predicted, in about 500,000 home sales — an increase of slightly more than 10 percent over today’s depressed sales rate. If the program were extended to people who simply wanted to refinance, Mr. Yun warned, the government’s cost could easily be 10 times higher.
Neel T. Kashkari, the assistant Treasury secretary who is overseeing the $700 billion bailout plan, publicly confirmed on Thursday that the mortgage plan was under consideration but offered no other details.
People familiar with the discussions said Treasury officials were still debating the exact mechanism for financing the cheap mortgages. The main idea is to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance companies, to buy up and guarantee 30-year, fixed-rate mortgages paying 4.5 percent interest.
The Treasury would provide the money by buying up the mortgage-backed securities from Fannie and Freddie.
The plan closely resembles a proposal developed by Christopher J. Mayer, vice dean at the Columbia Business School.
“This really is the opportunity of a lifetime,” he said. “If you ask someone if this is the time to come into the market, I think anyone who would have bought a house in 2007 and was sitting on the sidelines, or who wants to buy this year or would buy in 2010, would want to take advantage of this.”
Mr. Mayer said long-term Treasury rates are so low right now that the government could actually make a profit on the cheap loans. The Treasury can sell 10-year bonds right now and pay only 2.7 percent a year, far below the 4.5 percent that it would be charging home buyers.
But he said his own preference was to make the mortgages available to existing homeowners as well as home buyers.
“I think there are additional benefits one could have by extending the program for people who refinance,” Mr. Mayer said. “At 4.5 percent, you might be looking at 25 million people who could refinance and the average savings could be $400 to $500 a month.”
In the past, Treasury and Fed officials often pleaded that their rescues of Wall Street were crucial to the well-being of Main Street. But the new Treasury idea would amount to directly helping Main Street.
Meanwhile, Mr. Bernanke all but reversed the rhetoric of recent months by arguing that helping homeowners avoid foreclosure was critical for the whole economy.
“Steps that stabilize the housing market will help stabilize the economy as well,” Mr. Bernanke said. “Reducing the number of preventable foreclosures would not only help families stay in their homes, it would confer much wider benefits.”
Mr. Bernanke, speaking at a Fed conference on housing, outlined proposals for bolder government action. He suggested that the Treasury subsidize lower fees and interest rates on a new program, Hope for Homeowners, that is intended to help troubled homeowners refinance at much lower rates. At the moment, lenders pay an upfront insurance premium of 3 percent of the loan value and borrowers face fairly high interest rate of 8 percent.
Mr. Bernanke also supported a proposal by the Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, to have the government engineer as many as 1.5 million loan modifications. The Treasury and White House have fought the idea for months.
Finally, Mr. Bernanke proposed that the government share the cost when a mortgage servicer reduces a borrower’s monthly payment. Preventing foreclosures, he said, “should be high on the agenda.”

http://www.nytimes.com/2008/12/05/bu...agewanted=1&em
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Lol at only helping new buyers.

[Nyteshade]

As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford.

I have no pity for them to begin with.

[C-fer]

Hell yea, I knew there was a reason I waited to buy a house.

Low interest rates FTW.

[PETA]

bailing out current owners in default would:

1) banks would have an incentive to foreclose knowing the gov't would step in to rescue the mortgage... who better than Uncle Sam to gaurantee to note

2) it would help prevent RE price correction and artificially prop values because home would not go through foreclosure or even sale by current owner

3) would eliminate the potential benefit to otherwise would be buyers who are now closed out of the market when the gov't steps in to save borrower in default

[tricky]

The whole 'bailout' is a crock of shit. We bail out the financial institutions, only some homeowners, and probably not the car industry (which is the only industry that actually makes a tangible good).

Fuck em all.

[C-fer]

Originally Posted by tricky

The whole 'bailout' is a crock of shit. We bail out the financial institutions, only some homeowners, and probably not the car industry (which is the only industry that actually makes a tangible good).

Fuck em all.

What homeowners are being bailed out? I haven't heard anything of this sort.
This is to help promote new homeowners, but it's hardly a bailout.

[PETA]

Originally Posted by DjKrispy

What homeowners are being bailed out? I haven't heard anything of this sort.
This is to help promote new homeowners, but it's hardly a bailout.

If the program lends money cheaply to those who can afford the notes in order to buy distressed property it could well help those who are in trouble with their mortgages... presuming of course that they didn't see property values plummet so much that they're ridiculously upside down such that they're selling at a steep loss

[C-fer]

Originally Posted by St. Stalin the Apathetic

If the program lends money cheaply to those who can afford the notes in order to buy distressed property it could well help those who are in trouble with their mortgages... presuming of course that they didn't see property values plummet so much that they're ridiculously upside down such that they're selling at a steep loss

Better than the owners of the distressed property totally losing everything on the house. It's a risk all homeowners take that their property won't be worth as much in the future. I guess it is a "bailout" but in my opinion, it's more logical than just sending out 25 billion in checks to homeowners in need saying "here you go". Which is basically what they will be doing for the auto industry.

[tricky]

Originally Posted by DjKrispy

Better than the owners of the distressed property totally losing everything on the house. It's a risk all homeowners take that their property won't be worth as much in the future. I guess it is a "bailout" but in my opinion, it's more logical than just sending out 25 billion in checks to homeowners in need saying "here you go". Which is basically what they will be doing for the auto industry.

Those asshats came back and asked for $34 billion...

[tricky]

Originally Posted by St. Stalin the Apathetic

If the program lends money cheaply to those who can afford the notes in order to buy distressed property it could well help those who are in trouble with their mortgages... presuming of course that they didn't see property values plummet so much that they're ridiculously upside down such that they're selling at a steep loss

And what about that section? I thought overpriced housing was a huge part of the problem? Somebody is still gonna have to eat that loss.

[MOM]

didnt read the article...but my real estate professor told us about this Tuesday... He says there is also a tax credit of $22,000 if you buy a house next year. Don't know if the article stated that and forgot if my prof said that was already a fact or if they are tossing around that idea.

[PETA]

Originally Posted by tricky

And what about that section? I thought overpriced housing was a huge part of the problem? Somebody is still gonna have to eat that loss.

Overpriced housing is (or was rather) part of the problem. Some one will have to eat that loss. Artificially inflating values through bailouts of home owners in default is, imo, unwise for the reasons I gave.

I said buying out distressed property could help the home owner in default unless they were seriously upside down. If that's the case buying their property at a price significantly less than what they paid for it doesn't help them out much. I wasn't being cryptic.

[tricky]

Originally Posted by St. Stalin the Apathetic

Overpriced housing is (or was rather) part of the problem. Some one will have to eat that loss. Artificially inflating values through bailouts of home owners in default is, imo, unwise for the reasons I gave.

I said buying out distressed property could help the home owner in default unless they were seriously upside down. If that's the case buying their property at a price significantly less than what they paid for it doesn't help them out much. I wasn't being cryptic.

I didn't say it was cryptic. It sucks for those losing out due to serious declines in their home values. For the other guy, it's great. Winners, losers

It's a shitty situation for all involved...hopefully we can figure out someway to fix it without just throwing money at it like the finance industry. Glad I didn't buy a home in 2006