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December 2009 Commentary on the Real Estate Market
by Peter L. Zachary, MAI, MRICS

On Sunday, December 13, 2009, there were two articles, one in the NY Times, which was entitled "Rates are Low, but Banks Balk at Refinance - Stricter Credit Rules" and one in the New York Post entitled "New Housing Crisis. Obama Mortgage Plan "Failure" Could Spark 2nd Collapse."

The New York Times Article said:

"Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out. The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession." The article continues: "Refinancing could save owners hundreds of dollars a month, which could be spent, saved or used to pay down debts. Extra spending would help lift the economy, and lower payments might spare some people from losing their homes to foreclosure. President Obama, in his weekly address on Saturday, placed much of the blame for the recession on "the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences." "The government has succeeded in driving mortgage rates down to their lowest level in our lifetime; said Guy Cecala, the publisher of Inside Mortgage Finance magazine. That hasn't been a big home run, because a lot of people can't take advantage of it." The article states that Andrew Knapp, a sales executive, in Bartlett, Ill., has tried twice to refinance, which would save his family several hundred dollars every month. Lenders said the house had lost value and the Knapps had too much debt. "There was no urgency for them do anything," Mr. Knapp said.

The article continues: "The most recent Federal Reserve survey of lenders found that they were continuing to tighten terms for business and household loans. Banks say they are under pressure from regulators to raise their cash reserves, which means fewer loans. They also argue that a troubled economy breeds extreme caution. "More than ever before, lenders are very conscious of making good quality loans," said Michael Fratantoni, the vice president for research at the Mortgage Bankers Association. "They are looking at the value of the collateral and the credit quality of the borrower." For Mr. Knapp, the sales executive, any such program would be too late. He has given up on the possibility of refinancing and is trying for a loan modification. If that does not work, there is one more solution: walking away from his home. "We're a flight risk," he said."

The New York Post article said:

"The US housing market could be looking at a second steep decline in 2010 after statistics released last week show how poorly the Obama administration's mortgage modification plan is working. The millions of families hoping for a permanent mortgage modification may never get one - and with their homes worth less than they owe on their loans, they may decide to walk away from the home voluntarily or be foreclosed upon as their trial modifications expire. The snail's pace of permanent mortgage modifications - just 31,382 out of 3.3 million eligible loans have been cut - could result in hundreds of thousands of additional vacant homes, which could accelerate the decline in house values. Critics jumped all over the White House's "Home Affordable Modification Program," or HAMP. "It was an incredibly bad idea from the Obama administration," Anthony Sanders, a real estate finance professor at George Mason University, told The Post last week. Sanders said the paperwork involved and the lack of solid income verification spelled doom for HAMP. Laurie Goodman, a senior managing director at Amherst Securities, has been saying since the inception of HAMP in February that the only way it was going to succeed was if banks cut the principal of underwater loans - something they haven't been doing. Under HAMP, borrowers are struggling through trial modifications of interest rates. Many can't afford even the lower monthly payments - while they see arrears pile up and the home sink, financially speaking, further under water." The article states: "Goodman called HAMP, "a failure," and said, "it is inevitable that there will have to be a HAMP 2." "We agree that servicer performance in converting trial modifications to permanent ones has been un¬satisfactory," a Treasury spokeswoman said in a statement. HAMP is also highlighting the precarious financial position the banks are in. If the banks don't cut the principal of the mortgages, they are likely to end up with more vacant homes. If they do give the mortgage a serious rate cut to keep the family in place, then the value of the second lien on the home - which the banks carry on their books - could be wiped out. And that could make several banks insolvent. In an ironic twist, the only thing worst than HAMP's failure would have been the absolute success of RAMP, Sanders noted. "Can you imaging saddling the banks with 2 percent, 40-year mortgages should there be inflation?" he asked. "You think the banks are not lending money now, they would never lend money under those circumstances."

I am afraid for al the government jawboning and legislation to help the "little person"; the banking industry will prevail by extending the foreclosure process and concurrently not lending to homeowners. The banking industry got bailed out by the US Government (tax payers) in turn told the tax payers: "You are on your own". I would like to wish everyone a happy Holiday Season and if there are any Christmas left in this country, Merry Christmas.

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