Commentary on the Real Estate Market as of 03/01/08
by Peter L. Zachary, MAI, MRICS
"Global Finance Leaders Warn of Risk from US Housing Woe" is the name of an article appearing in the International Section of the Sunday, February 10, 2008 issue of the New York Times. The Times article states "Finance leaders from the world's wealthiest nations (US, Japan, Germany, France, Britain, Italy and Canada) warned Saturday that global economic woes could get worse from the slump in the American housing market, but offered few specific remedies. The German Finance Minister, Peter Steinbrück, said members agreed that write-offs at banks related to sub-prime mortgages could reach $400 billion, about four times estimates just a couple of months ago.
The subprime mortgage crises may be spreading into government finance. The February 15, 2008 issue of the Daily News stated that New York's Governor Spitzer and State Insurance Superintendent Eric Dinallo of New York went to Washington to urge lawmakers to help bond insures. The News states "Bond insurers like MBIA and Ambac, which had initially focused on municipal bonds, have been slammed with losses after branching out into guaranteeing riskier consumer debt, including subprime mortgages, that lost value as housing prices fell." The article continues: "Governor Spitzer is worried that the interest rate the state will have to pay in its bonds will increase because investors will not have faith in the insurers who insure those bonds to investors." Superintendent Danillo stated: "We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses". Nor should sub-prime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects."
But the sub-prime mortgage crisis is not the only thing dragging the economy down. The Sunday, February 17, 2008 issue of the New York Times had a front page article titled "Arcane Market is Next to Face Big Credit Test". The article states "Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street a decade ago. But if the economy keeps slowing, like subprime mortgages, may become a household term. The Times makes the analogy to homeowner's insurance by stating "Like a homeowner's policy that insures against a flood or fire, these instruments are intended to lower losses to banks and bondholders when companies fail to pay their debt". The Times states: "the market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion – roughly twice the size of the entire United States stock market. The Times continues, "No one knows how troubled the credit swaps market is, because like the now distressed market for sub-prime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction at financial institutions, making it even harder for borrowers to get loans that grease economic activity. An example of how this can affect the stock market and the economy is cited by the New York Times when it stated the American International Group (AIG) said that it has incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated. As a result, its stock dropped 12% on the news.
But back to the real estate market. The Friday, February 22, 2008 issue of the New York Times stated that nearly 10.3% of the nations homeowners are "under water". This means that their mortgages are higher than the value of their houses. The article states the Democrats and Republicans alike are scrambling for ideas to keep people from simply walking away from their homes.
The Federal Housing Administration is examining ways to expand its new insurance program, known as FHA Secure, to help people replace their costly sub-prime mortgages with federal guaranteed fixed rate mortgages. In my opinion, some version of the above would be very helpful. The article continues, "A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home. It would take the remainder of the mortgage as a 'negative amortization certificate', a lien that the investor could recoup if the house were later sold for its original mortgage value or higher. In an interview, Mr. Reich said he hoped that most of the old mortgages would be replaced by cheaper mortgages insured through the FHA. 'It isn't a bailout,' Mr. Reich said. 'It is a market-driven solution.'"
Perhaps the best solution to the sub-prime mortgage crises is in an article written by Mortimer B. Zucherman, owner of the Daily News. In an article published in the March 2, 2008 Daily News, entitled "Rush to the Rescue, Uncle Sam Must Take Bold Steps Now to Stop our Fiscal House from Burning", he states that the federal government helped the US economy after the depression by creating the Home Owner's Loan Corp., which granted over a million mortgages at low interest rates. He cites Alan Binder, a former vice chairman of the Federal Reserve Board of Governors, who recommends such an agency that would refinance only owner-occupied residences, leaving speculators to fend for themselves and excluding second homes and vacation homes, along with very expensive real estate. While the details of this proposal may become complicated, it would be a large step toward helping the economy to regain strength by allowing credit to become more available, although with tighter leading standards.
President Bush wants to wait to see the effect of massive rate reductions by the Federal Reserve. There were 5 rate cuts in the month of January. More next month.
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