Archive for January, 2010
The U.S. Federal Reserve's balance sheet rose to a record in the latest week, boosted by its ongoing efforts to support the mortgage market, Fed data released on Thursday showed.
The Fed's balance sheet — a broad gauge of its lending to the financial system — rose to $2.274 trillion in the week ended Jan. 13 from 2.216 trillion in the prior week.
I can have as much fun as the next guy fulminating about Wall Street bonuses, but it's time to move on.
There's nothing new to say, nor is there much that can or will be done about them.
It should be some consolation that nearly half of the bonuses will get siphoned off in state and federal taxes.
And while the sums are undeniably outrageous and undeserved, the same could be said of the pay earned by professional athletes, rock stars and corporate chief executives.
Housing industry analysts estimate that more than 10.8 million homeowners have negative equity, and thus face imminent mortgage default. The government’s effort to provide these homeowners a viable short sale alternative with incentives through the new Home Affordable Foreclosure Alternatives Program (HAFA) deserves kudos for effort. Short sales reduce long-term vacancies, leverage existing market mechanisms, and keep neighborhoods intact.
Unfortunately, HAFA lacks the necessary incentives to get people moving.
Property values won’t rise significantly anytime soon. To date, loan modifications have been viewed as the primary solution to the foreclosure crisis. We now know, however, that borrowers with substantial negative equity are unlikely to retain their homes under any circumstances. Given the right options, it’s a safe bet they would readily opt for an alternative to foreclosure if the outcomes and consequences were truly better.
In this regard, HAFA falls short. If we want the program to succeed and short sales to become an effective option, HAFA must offer competitive incentives and lighter penalties. This starts with getting inside the minds of homeowners who have already done the math and concluded that the metrics associated with foreclosure work in their favor over the short term.
Who can blame them? The short sales relocation benefit doesn’t stack up to the “cash for keys” incentive and the savings afforded from living months in default and rent (mortgage) free. What else do these distressed homeowners have to lose? The industry hasn’t differentiated the credit impact and penalties between a short sale and foreclosure. Homeowners have no real motivation to be proactive.
With a few minor tweaks, however, HAFA could avoid this stalemate and truly incite action. Here are some changes that would help:
- Lower the penalty period for homeowners, so they can return to the market sooner. Fannie and Freddie underwriting guidelines prohibit anyone with a bankruptcy or foreclosure from being eligible to receive a new mortgage for a period of four years. Reducing this “lock-out” period from four years to two years for people who pursue a short sale, gives distressed homeowners a tangible incentive to choose short sale over foreclosure.
- Revamp incentives for short sales and foreclosures. HAFA currently provides $1500 for relocation expenses, whereas most lenders are paying foreclosed borrowers in excess of $3000 for “cash for keys”. At minimum relocation benefits for short sellers need to equal or beat “cash for keys” payouts.
- Differentiate the credit consequences between short sales and foreclosures. The industry must create some uniformity around how short sales are reported to the credit bureaus. We must enable people to recover faster so that they have the option to reenter the market sooner while home values are still affordable.
Negative equity mortgages are predicted to be the single largest driver of future defaults. HAFA and the streamlined short sale alternative it offers homeowners have the potential, with a few key changes, to avert further losses and stabilize communities.
Without question, any solutions that help us avoid more shuttered neighborhoods and move millions of disenfranchised homeowners to stable ground is a step in the right direction that will benefit us all.
Gary Acosta is chairman of New Vista Asset Management and co-founder of the National Association of Hispanic Real Estate Professionals (NAHREP).
Let’s dig a little deeper into the jobs situation. We expect the January report is going to be a startling one when it is released in early February. It will be the first time we will see the full results of the annual revisions of the benchmarks used by the Bureau of Labor Statistics. The revisions will show that there was a net job loss in the United States for the entire decade. We guess the net loss will be about 1 million.
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Some of the details in the report show how severe things are. The unemployment rate for college graduates hit a new all-time high of 5%. The fact that 1 in 20 graduates cannot find a job means that the cost pressure from the higher-paid and better-educated element in the labor force has disappeared. Labor cost is about two-thirds of the impetus that triggers inflation. This is another reason why the Fed has plenty of time before it has to raise rates. Inflation is not a threat.
The Congressional Budget Office, in a report released Thursday, continues to project that the federal government's involvement in Fannie Mae (FNM) and Freddie Mac (FRE) will generate losses for taxpayers.
The U.S. Treasury Department, seeking to maintain solvency at the two government-chartered mortgage finance companies, is slated to make quarterly capital infusions over the next three years to cover gaps between Fannie and Freddie's assets and liabilities.
In exchange, the institutions will issue to Treasury senior preferred stock, which pays 10% annual dividends.
Even though Fannie and Freddie are expected to generate revenue that exceeds their losses and other costs as the housing and mortgage market recovers, "the entities' current dividend commitments to the Treasury exceed their future earnings capacity, making losses on the Treasury's current and future holdings of their senior preferred stock likely," the CBO report said.
