Posts Tagged ‘home foreclosures’

Could Wall Street Save the Housing Market: Part 2

Thursday, August 2nd, 2012

My recent column on the Huffington Post reported on the advent on Wall Street into the housing market as companies like Blackstone and Colony Capital commit billions of dollars to bulk buying bank-owned (REO) single-family homes.

I agree that there are pros and cons to this program. The clear source of popular resentment is that the equity lost by homeowners as their home values plummet will be recaptured by large investors when they go to flip the assets once asset prices start to stabilize. Given the low cost of leverage and the low acquisition prices, the large-cap investor wouldn’t have to wait for prices to get back to par in order to make their targeted returns. So, is there another way? Well, yes. Homeowners could stay in their homes. That’s why the Obama administration created the Home Affordable Modification Program (HAMP) which has saved approximately 802,000 U.S. homeowners from foreclosure as of April 2012 – a worthy achievement but far from the 4 million expected and not enough to make a dent in the housing problem. HAMP was tempered by the lack of lender participation in the program. Of HAMP’s $30 billion budget, thus far it has only spent $3.23 billion.

To go back to the investment firms, remember that part of the strategy is to avoid evicting people from their homes. In the best of circumstances, these homes would be rented to their former owners who would also have an opportunity to acquire the home as the exit strategy. Each of these firms has their own strategy but I’ve spoken personally to private equity firms that are making a good faith attempt to prevent people being ejected from their homes for a simple reason – it’s preferable and cheaper than having to re-lease these homes. What are the alternatives? We could let the bad loans sit on the books of financial institutions which can cripple the credit system for years or decades (that’s what happened to Japan in the 1990s); or foreclosed homes can end up being acquired piecemeal in one-off or small auctions which isn’t efficacious in bringing back an enormous market. The argument to be made is that the Wall Street may be that critical intermediary step before the consumer sector is ready to take back the housing market.

A good analogy is what happened in commercial real estate. In 1989, the market hit bottom because of the Savings & Loan crisis.  S&L’s made hundreds of billions of dollars worth of loans on commercial real estate and saw asset prices freefall after Black Monday. Between 1989 and mid-1995, the government stepped in under the guise of the Resolution Trust Corporation which closed or otherwise resolved 747 thrifts with total assets of $394 billion. At the peak in early 1990 there were 350 failed savings and loan institutions under the agency’s control. Just like the GSEs today, they organized bulk sales of commercial buildings and loans.  Who bought them? Large Wall Street firms. It was an enormous transfer of wealth, no question,  but it also brought a new professionalism to the industry – portfolio-level strategy, transparency in pricing and underwriting, a new skill in operations, managing supply and demand, and accurate reporting. Our industry was transformed.  By the late 90s, asset prices shot back up and reached record levels. In 2007, when the recession hit, the industry was affected but far less than it would have been had it not been for how it had evolved. We simply didn’t have the levels of overbuilding that we did in previous recessions. And, incidentally, Wall Street allowed the person on the street into the industry.  The level of public ownership of commercial real estate today is unprecedented. For the first time, your 401K and stock broker could invest on your behalf in commercial buildings. And REIT stocks remain one of the strongest in all of the equity markets today. So, there will be struggles but the housing market will certainly benefit from this — the rigor and reporting that Wall Street will bring to the single family sector which will help make it much better prepared to face future recessions.

Fannie, Freddie Bailouts Could Cost the Taxpayers $154 Billion

Monday, November 8th, 2010

Taxpayer bill for Fannie, Freddie bailout could reach $154 billion. The ultimate cost of bailing out Fannie Mae and Freddie Mac could cost as much as $154 billion unless the economy improves, according to a government report.  The mortgage giants rescue – which has kept the housing market on life supports – already has cost $135 billion to cover losses on home loans in default.  The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, says the most likely scenario is that house prices will have to fall slightly during a slow economic recovery, then rise a bit.  If that occurs, the Fannie and Freddie bailout will cost taxpayers an additional $19 billion.  A more upbeat prediction sees the housing market recovering sooner, which would require just $6 billion more for a total bill of $141 billion.

Washington, D.C., research firm Federal Financial Analytics believes the FHFA projection provides a sound indication of what the bailout will cost, but “nowhere near a definitive picture of it.”  Fannie and Freddie issued a joint statement that said “It’s simply impossible to forecast reliably now how much foreclosuregate will cost.”  Fannie and Freddie’s plight stands in sharp contrast to the success of the Trouble Asset Relief Program (TARP), which is now expected to cost just 10 percent of the $700 billion originally forecast.

Federal regulators seized Fannie and Freddie in September of 2008 in the wake of the financial crisis.  Since then, the government has kept the agencies solvent, with President Obama pledging unlimited support.  “From the beginning, the Obama administration has made it clear that the current structure of the government’s role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long term,” said Jeffrey Goldstein, Treasury Department undersecretary for domestic finance.

Economy Grows 3.3 Percent During 2Q

Wednesday, September 3rd, 2008

Contrary to the recent grim news about home foreclosures, bank failures, the credit crunch, rising unemployment rates, soaring oil prices, inflation and stock-market jitters, the United States’ economy — surprisingly — grew by 3.3 percent during the second quarter of 2008.

The economy grew at its fastest pace in nearly a year, thanks primarily to foreign buyers purchasing inexpensive U.S. exports, as well as the tax rebates that sent Americans on a shopping spree.

According to Commerce Department statistics, the GDP increased at a 3.3 annual rate from April through June.  This revised statistic represents a significant improvement over the initial 1.9 percent estimate, and exceeded economists’ expectations of a 2.7 percent growth rate.

The rebound was welcome news after two grim quarters.  The economy contracted during the last three months of 2007, and registered a feeble 0.9 percent growth rate during the 1st quarter of 2008.  Spring’s 3.3 percent performance was the best result since the third quarter of 2007, when the economy grew by an impressive 4.8 percent.

Still, the good news is something of a fluke.  The economy is still quite fragile, according to Federal Reserve Chairman Ben Bernanke, who recently warned that the weakness will remain throughout 2008.  Analysts expect the economy to hit another pothole during the 4th quarter, once the glow of the tax rebates dims.  Additionally, exports could decline if other nations experience similarly slowing economies.

Add presidential politics into the mix.  Democratic nominee Barack Obama favors a second government-stimulus package, while Republican John McCain supports free trade and other business measures to energize the economy.  With less than two months remaining until the election, the candidates are certain to have a lot more to say on how they plan to energize the economy.