Archive for the ‘Residential’ Category
Thursday, May 12th, 2011
New home sales rose in March, with the number of properties on the market at its lowest since the 1960s. Additional gains will be stymied by competition from the market’s glut of previously owned houses. Single-family home sales rose 11.1 percent to a seasonally adjusted 300,000 unit annual rate, according to the Department of Commerce, during a month when economists had expected a 280,000-unit pace. Even with the March uptick, new home sales are just bouncing along the bottom. Despite the good news, the number of houses sold still is 21.88 percent less than the level achieved one year ago. The news was released by the U.S. Census in its monthly New Residential Home Sales Report for March.
“Investors continue to drive the market and were about 22 percent of the purchasers in March, up from 19 percent a year ago,” said economist Joel Naroff, of Naroff Economic Advisors, in Holland, PA. Investors typically look for foreclosures or short sales. “They love those cheap distressed homes, which now make up 40 percent of the market,” Naroff said. “Given the tight lending standards cash buyers are more than welcome. To get a Fannie or Freddie loan, which are the only games in town, a borrower has to have a credit score of about 760. Before anyone gets excited and thinks housing is on the rebound, understand that we need to more than double the March sales pace to reach decent sales levels,” Naroff said. “Prices remain soft and are down by about five percent over the year.”
According to Dirk van Dijk of the Wall Street Pit, “The March level was substantially better than the expected rate of 280,000. The 11 lowest months on record (back to 1963) for new home sales have all been in the last 11 months. We are down sharply from a year ago, and it is not like a year ago was a great time in the homebuilding industry either. Relative to the peak of the housing bubble (July ’05, 1.389 million) new home sales are down 78.4 percent. Inventories of new homes were down 1.1 percent on the month and are down 19.7 percent from a year ago. Supply is at 7.3 months, down from 8.0 months in February, but up from 7.1 months a year ago. While that is well off the peak of 12.0 months, it is still above normal. A healthy market has about a six month supply of new houses and during the bubble, four months was the norm.”
The median price of new houses sold in March was $213,800, according to the Census Bureau. “It’s a decent start to the spring selling season, but we’re coming off all-time lows here, so we’re not going to get too excited,” said Brett Ryan, economist with Deutsche Bank Securities. “The overhang of foreclosures drags on new home sales. Builders are waiting for a clearing process to take place.”
The housing market was either “little changed from low levels” or weaker across the country, the Federal Reserve said in its most recent Beige Book report. The absence of a continued housing rebound is one of the reasons why policymakers will complete their $600 billion asset purchase plan and keep borrowing costs at nearly zero to encourage growth.
Last year was the fifth consecutive year of declining new-home sales. According to economists, it could take years before sales return to a healthy pace. Slow new-home sales add up to fewer jobs in construction, which normally powers economic recoveries following recessions. Each new home creates an average of three jobs for a year and adds $90,000 to the local tax base, according to the National Association of Home Builders.
Tags: Beige Book, Credit scores, Department of Commerce, Deutsche Bank Securities, economic recovery, Fannie Mae, Federal Reserve, foreclosures, Freddie Mac, Housing bubble, National Association of Home Builders, New home sales, New Residential Home Sales Report for March, Previously owned homes, recession, short sales, U.S. Census Department
Posted in Economics, General, Residential | No Comments »
Monday, May 9th, 2011
Ben Bernanke’s first-ever press conference is important because the unprecedented move gives the world a look at the inner workings of the often arcane Federal Reserve. As a general rule, the Fed’s chairman avoids press conferences. Typically they issue statements that are worded with extreme care. Since the economic meltdown, however, the Fed’s increased role in crafting the nation’s fiscal policy has been under the microscope. As a result Bernanke decided to start holding press conferences every few months “to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication”
Veteran Fed watchers say Bernanke will avoid make any unexpected observations about the economy. The Fed almost certainly won’t raise interest rates or change the course of the Quantitative Easing 2 (QE2) program to boost economic recovery. What makes the event important is that it is a new chapter in the history of U.S. central banking, one that brings transparency that allows the Federal Reserve to make its case for monetary policy directly to the American people. The press conference, “whose ostensible purpose is to add more transparency regarding Fed policy, is really designed to help repair its image with the general public, a process that began when Bernanke first appeared on ’60 Minutes,’” writes Bernie Baumohl, chief economist at The Economic Outlook Group. “The press conference serves multiple purposes. It helps explain the Fed’s role in the economy, improves public trust in the central bank, and can be used discreetly as a platform to place more pressure on Congress to reduce the swelling budget deficits.” During the financial crisis, some criticized the Federal Reserve’s role in the economy, with conservative Tea Party movement members calling for a dissolution of the Fed or a Congressionally-mandated opening up of the once-secretive central bank. The press conference is intended to silence the critics by providing certain details that were previously denied.
The Fed is notoriously tight lipped. Until 1994, the Fed never notified’ the public of policy changes, leaving an army of Wall Street “Fed watchers” to figure them out for themselves. The Federal Open Markets Committee (FOMC) did not release statements on a regular basis until 1999. The majority of Fed chairmen have shied away from the cameras. Now, Bernanke is welcoming them. Although Bernanke excels at not saying anything newsworthy, the timing of the first press conference comes at a particularly sensitive time: shortly before the end of the controversial QE2 monetary policy program, and during an argument over inflation. Bernanke and other FOMC members, such as Fed Vice Chairwoman Janet Yellen, argue that inflation remains subdued: Demand is slack, and core inflation below-target. But not everyone shares that view. More hawkish Fed officials, such as Thomas Hoenig of the Kansas City Fed, have pointed to frothiness in oil, food, and commodities markets to make loud calls for tightening.
Writing in the Atlanta Journal Constitution Washington Insider columnist Jamie DuPree says that “Ben Bernanke starts what will be the first of four annual news conferences about the work of the Fed. The job of Fed Chairman has always been a little mysterious, feeding a variety of conspiracy theories about its work and ties to other groups like the Trilateral Commission and more. The news conferences will take place four times a year, after the Fed meets for its quarterly policy-making meeting, where announcements are made on interest rates and economic policy. Bernanke is no stranger to the limelight, as he testifies regularly on Capitol Hill, taking questions from lawmakers. But Fed Chairs usually don’t do press conferences – and you don’t have to have much of an imagination to wonder if there could be some odd questions thrown his way. In fact, Fed Chairs often don’t do interviews either, making his twice-per-year testimony before the Congress a big story to cover. Because the insight of the Fed Chairman is so important to the markets, the Federal Reserve does not want the testimony leaked early, for fear that someone could use it to manipulate trading in some way.”
Tags: Atlanta Journal Constitution, Ben Bernanke, congress, Economic meltdown, economic recovery, Fed Watchers, Federal Open Markets Committee, Federal Reserve, financial markets, Global markets, inflation, Janet Yellen, Joint Economic Committee, Kansas City Fed, Press conference, Quantitative Easing 2 (QE2), Tea Party movement, The Economic Outlook Group, Thomas Koenig, Trilateral Commission, “60 Minutes”
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Tuesday, April 26th, 2011
Federal regulators at the Departments of Justice, Treasury and Housing, as well as the Federal Trade Commission, have ordered the nation’s largest banks to revamp their foreclosure procedures and compensate borrowers who were financially hurt by “pervasive” bad behavior or carelessness. According to the bank regulators, failure to comply with the rules will result in fines and a broad investigation conducted by state attorneys general and other federal agencies. The regulators acted after being criticized for not putting a halt to risky lending practices during the housing boom.
Describing the lending practices as “a pattern of misconduct and negligence,” the Federal Reserve said that “These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices at these institutions.” Borrowers in trouble have complained that applying for a modification using the Obama administration’s program has been too complicated and characterized by multiple games of telephone tag. Enforcement requires servicers to set up compliance programs and hire an independent firm to review residential-foreclosures. The banks will be required to make sure that communications are more “effective” between borrowers and banks when it comes to foreclosure and mortgage-modification proceedings.
Citibank, Bank of America, JPMorgan Chase and Wells Fargo, the nation’s four leading banks, top the list of financial firms cited by the Federal Reserve, Office of Thrift Supervision and Office of the Comptroller of the Currency. Citigroup said that it had “self-identified” desired changes in 2009 and that it has helped more than 1.1 million homeowners avoid foreclosure. “We are committed to working with our regulators to further strengthen our programs in these areas and meeting these new requirements,” the company said.
As stern as the recent move seems to be, there are still critics. “These consent orders are worse than doing nothing,” said Alys Cohen, staff attorney for the National Consumer Law Center. “They set the bar so low on some things and they give the banks carte blanche on others. And they give the appearance of doing something while giving banks control of the process.” Additionally, consumer advocates and members of Congress said the new rules are too little, too late.
Congressional critics maintain that the order is too moderate. House Democrats introduced legislation that would require lenders to perform specific actions, including an appeals process, before starting foreclosures. “I want to know what abuses (the government agencies) identified, which banks committed them and how their proposed consent agreement is going to fix these problems,” said Rep. Elijah Cummings (D-MD) the ranking member of the House Government and Oversight Committee. “Based on what I have read…I am not encouraged at all.”
More than 50 consumer groups don’t like the settlement, and claim that the expected settlements do little more than require mortgage servicers to obey existing laws and that they lack penalties. “They’re left to police their new improvements,” said Katherine Porter, a University of Iowa law professor who is an expert on mortgage services. Another concern is that the settlements may weaken the ability of 50 state attorneys general to force concessions from mortgage servicers. The attorneys general have been investigating mortgage servicers since last fall, and in March sent the companies a list of terms, which go further than those pursued by bank regulators. Iowa Attorney General Tom Miller, who’s leading the joint effort, says any settlements with banking regulators will not “pre-empt” the states’ efforts.
Tags: Bank of America, bank regulators, Citibank, congress, Department of Health and Human Services, Department of Justice, Federal Reserve, Federal Trade Commission, foreclosure, House Government and Oversight Committee, house of representatives, J P Morgan Chase, National Consumer Law Center, Obama administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, Predatory lending, Regulations, Representative Elijah Cummings, Treasury Department, Wells Fargo
Posted in Economics, Financing, General, Residential | 1 Comment »
Tuesday, April 12th, 2011
The recent construction industry mantra of “Wait until next year” may be coming to fruition in 2011, according to a recent survey conducted by ENR. The 1st quarter of 2011 Construction Industry Confidence Index (CICI) survey soared to 51 on a scale of 100, a significant increase from the 43 percent reported in the 4th quarter of 2010. The rise marks the first time the CICI has risen above 50 since March of 2009 and provides hints of a market that is stabilizing. The survey of 679 construction and design executives suggests that the market has hit bottom and should improve throughout the year.
The uptick in market confidence is in step with the most recent CONFIN-DEX survey conducted by the Construction Financial Management Association. This survey of contractors, general contractors and civil contractors spiked to 131 from 117 on a scale of 200, said Mike Verbanic, the organization’s director of marketing. The most encouraging statistic is the increase that measures current business conditions, which rose to 145 from 129, again on a scale of 200. “What makes these indices doubly reassuring is that our members are not wild gamblers, so their responses are measured and based on conditions they see,” according to Verbanic. CFMA’s survey found some bad news in the financial conditions index, which rose to 116 from 105. “These indices show that CFMA members expect demand to increase, but that credit and project financing may lag,” said Anirban Basu, CEO of Sage Policy Group, Inc., an economic consulting firm.
Although relatively few survey respondents plan to start office construction projects anytime soon, the strongest sectors are hospitals and healthcare facilities; distribution centers and warehouses; multi-family residential; retail; hotels and hospitality; and entertainment. Fully 27.6 percent of respondents said client access to credit is an ongoing problem, while 51.8 percent said that access to credit is easier now than just a few months ago. An additional 20.7 percent believe that access to credit is easing.
Construction companies are concerned about the price of materials. A significant 80.3 percent of respondents said they are experiencing pressure on the cost of materials and equipment. The cost of steel, copper and gas were mentioned most often. According to Basu, the Producer Price Index has shown substantial price pressure recently. “The dollar has been softening recently and there is evidence that commodity speculators have become more active in the metals markets,” he said.
Tags: Civil contractors, Commercial office sector, CONFIN-DEX survey, Construction, Construction Financial Management Association, Construction Industry Confidence Index, contractors, Distribution and warehousing, economic recovery, ENR, entertainment, General contractors, Great Recession, hospitals, Hotels and hospitality, Multi-unit residential, producer price index, retail
Posted in Development, Industrial, Office, Residential | No Comments »
Tuesday, April 5th, 2011
The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities. The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009. The Fed’s previous record high earnings was $53.4 billion.
In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets. Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet. The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses. So far the Fed’s crisis-lending programs have earned handsome profits. The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market. As of last week, the Fed held a virtually identical quantity of such securities.
The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities. Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis. To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.
Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG). The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering. ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng. The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds. Maybe the Fed can do better in the marketplace.”
Tags: AIG, Ben Bernanke, central bank, Federal Reserve, financial crisis, mortgage-backed securities, Profits, securities, Sub-prime mortgage bonds, Treasury Department, Wall Street Journal
Posted in Economics, Financing, General, Industrial, Office, Residential | 1 Comment »
Tuesday, March 29th, 2011
Although analysts are sounding a cautionary note, the number of Americans applying for mortgages rose by 16.1 percent in the first week of March – the largest monthly increase since June of 2009. The activity could be due to investors with money to spend, and not the first-time homebuyers who will play a vital role in the housing market’s recovery. The refinance index increased 17.2 percent and the purchase index increased 12.5 percent, to the highest level this year. The refinance share of activity increased to 65.5 percent of all applications from 64.9 percent the last week of February. That’s the good news. That bad news is that mortgage applications are likely to decline over the next several months because homeowners are unable to sell their current homes and trade up. At present, cash buyers and investors — lured by low prices and soaring rents — represent the majority of sales, said Paul Ashworth, chief U.S. economist with Capital Economics. Also, rates are low. According to Zillow.com, the average 30-year fixed-rate mortgage is now 4.73 percent.
During January, first-time homebuyers fell to 29 percent of the market, the lowest percentage in almost two years. Foreclosures made up 37 percent of sales and all-cash transactions were 32 percent of sales — twice the rate when compared two years ago when the National Association of Realtors began tracking these deals. New-home sales fell to a seasonally adjusted rate of 284,000 in January. That is significantly less than the 700,000-to-800,000 pace considered healthy by a number of economists.
“Taking into account typical seasonal patterns, purchase applications rose to their highest level of the year last week. On an unadjusted basis, purchase application activity is the highest since last May,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “An improving job market is beginning to pave the way for an improving housing market. Additionally, mortgage interest rates remained below five percent for a second week, maintaining affordability for buyers and leading to an increase in refinance applications.” The four week average for the seasonally adjusted Market Index rose percent. The four week average rose 1.2 percent for the seasonally adjusted Purchase Index, while this average is up 3.6 percent for the Refinance Index. The refinance share of mortgage activity increased to 65.5 percent of total applications from 64.9 percent the previous week. Adjustable-rate mortgages (ARM) rose to 6.0 percent from 5.5 percent of total applications from the previous week.
“The housing market in the U.S. still has a lot of challenges ahead of it,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “Ultimately it’s all about how many homes still are going to hit the market. People don’t want to buy homes because they feel prices could fall further.”
Tags: adjustable-rate mortgages, BMO Capital Markets, Capital Economics, foreclosures, home sales, Market Composite Index, Mortgage applications, Mortgage Bankers Association, mortgage rates, National Association of Realtors, Purchase Index, Refinance Index, refinancing, Weekly Mortgage Applications Survey, zillow.com
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Tuesday, March 15th, 2011
Former California Governor Arnold Schwarzenegger recently called for the end of false debate over climate science, saying that we should not assume that China will create green technologies that Americans can adopt and to admit that global warming will impact the globe in coming years. In a speech at the APRA-E Energy Innovation Summit in Washington, D.C., Schwarzenegger said that changing to a green economy, fixing the environment and ending the political stalemate over carbon legislation are well within the power of today’s technology.
“We want a new era of energy independence, a new era of green technology and green jobs, a new era of better health from a cleaner environment, and a new era of American inventiveness,” Schwarzenegger said.
Schwarzenegger connected the green economy of the future to the current unrest in the Mideast. He said that the overthrow of foreign dictators seemed impossible a month ago but now seems inevitable. At the same time, he believes that defeatism about the ability of a green revolution to transform America will soon look incongruous. The former California governor also pointed to the recent volatility in oil prices resulting from upheaval in the Middle Eastern as a clear example of why the United States needs to wean itself off foreign oil. “Why should a dried-up desert country with a crazy dictator like Libya play havoc with America’s energy future?” Schwarzenegger asked.
Schwarzenegger pointed out that California offers a model for tech companies that can help vitalize the economy and cut greenhouse gases, while helping the country reduce its imports of oil. As governor, he signed a global-warming law that mandates reductions in greenhouse gases; California also has a renewable-energy mandate that has resulted in almost 20 percent of electricity coming from renewable sources.
He lamented the national discussion on clean energy, saying too much of it is stuck in the debate over the science of global warming. Instead, people should focus on immediate benefits from investing in green technologies, including improved health, economic growth, consumer savings from efficiency, and reduced dependence on foreign oil.
“Think about what it means that in the Central Valley of California, one in six children has to walk around with an inhaler. I know we can change the debate and win the debate,” he said. “We can’t talk about global warming, because people can’t relate to that.” Instead of creating “forward-looking policies” for energy use, elected officials are debating the science of global warming. “There is a disconnect between what is happening and what is being debated,” Schwarzenegger concluded.
Tags: APRA-E Energy Innovation Summit, Arnold Schwarzenegger, California, Carbon legislation, China, climate change, Energy independence, Green energy, green jobs, Green Revolution, Green technology, Libya, Middle East, Oil, “The Terminator”
Posted in Development, Economics, Financing, Industrial, Office, Residential | No Comments »
Wednesday, March 2nd, 2011
Canada avoided the collapse in housing prices that devastated American homeowners and the U.S. economy, thanks to tighter financial regulations, the lack of subprime lending and securitized mortgages. Foreclosures are rare. As a result, Canadian real estate steadily appreciated while property values in Florida, Arizona and other hard-hit American markets tanked.
According to James MacGee of the Federal Reserve Bank of Cleveland, The United States’ and Canada’s “Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust.
And what is that other factor? Canadians are a bit plodding: Perhaps the simplest story is that Canada was ‘lucky’ to be a late adopter of U.S. innovations rather than an innovator in mortgage finance. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles.”
Relaxed lending standards in the United States, highlighted by the rise in subprime lending, played a vital role in creating the housing bubble. This weakening of standards led to an increase in housing demand. Mortgages were frequently given to people who were likely to have trouble making payments. Extending credit to risky borrowers helped fuel the housing boom and set the stage for the resulting surge in defaults and foreclosures, which were a big factor in the housing bust. Additionally, according to the Case-Shiller Index, house prices in the United States from 2000 through 2006 appreciated at a rate nearly double that of Canadian residential real estate. In contrast with the United States, Canadian house prices continued to appreciate until late 2008, and are now nearly 80 percent higher in value than in 2000.
MacGee said “The potential risks of increased household mortgage debt depend critically upon its distribution across borrowers. To see how the distribution of mortgage debt has changed, we examined the distribution of the ratio of the outstanding loan to house value (the LTV) of borrowers. A high LTV implies that a small decline in the house price would leave the owner with negative equity. Negative equity is problematic as it removes the option for a homeowner who is unable to meet their mortgage payments to sell their home to repay the mortgage.”
Canadian home prices are leveling off in 2011, though, with an overall decline of 0.9 percent anticipated for the year. A home worth $100,000 will likely decline by $900 in 2011. In some areas, home prices might actually increase while other areas might see prices fall two or three times as much. The Canadian Real Estate Association (CREA) expects a 7.3 percent decline in home sales in 2011.
“Canadians are debt-averse,” said Kevin Fritz, a Canadian who recently purchased a home and made a 40 percent downpayment. This is an attitude that is partly cultural and partly shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. “People here don’t leverage.”
“It is a regulatory structure in Canada that created the Canadian mortgage system, and it was a regulatory and political structure in the U.S. that created the U.S. mortgage system,” said Ed Clark, chief executive of TD Bank. “The irony is…that one of the primal causes of the crisis was the U.S. mortgage system.”
In an interesting aside, more Canadians are finding housing bargains in Florida, and today account for eight percent of residential sales in the state. Doug Flood, who relocated to the Sunshine State from Toronto in 2008, now runs a business that helps his fellow Canadians find the home they want. “There’s clearly a perfect storm. If you’re Canadian, you’ve got very low interest rates at home if you want to borrow against your house. You’ve got a foreign exchange par, dollar-for-dollar. And prices down here that are 40 to 50 percent lower than what they were five years ago.”
To listen to our interview with the Brookings Institution about financial regulations, click here.
Tags: Arizona, Canada, Canadian Real Estate Association, Case Shiller Index, Doug Flood, Federal Reserve Bank of Cleveland, financial regulation, Florida, foreclosures, Foreign exchange par, Housing bubble, housing market, Housing prices, interest rates, James MacGee, Loan-to-value ratios, Off balance sheet vehicles, Securitized mortgages, subprime mortgages, TD Bank, United States
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Wednesday, February 23rd, 2011
The Obama administration and the Treasury Department have decided that Fannie Mae and Freddie Mac — the public-private housing finance model in place for the past four decades – will come to an end, although they pledged to continue backing the agencies’ existing obligations. “The GSE (government-sponsored enterprise) model is dead,” an Obama administration official said. The Treasury Department is currently working on three broad options for overhauling the mortgage lending system, but will let Congress make the final decision. The government bailouts of Fannie and Freddie have cost taxpayers nearly $150 billion.
Obama administration officials have emphasized areas of agreement with Republicans, stressing that they favor a system that is less dependent on government support. Approximately 90 percent of new mortgages are currently backed by Fannie, Freddie or other federal agencies. The move pleased Republicans, who have long criticized the mortgage companies. “I’m encouraged to see the administration included a number of reform ideas that track closely with my own,” Representative Scott Garrett (R — NJ) said. Garrett heads the House Financial Services subcommittee, which oversees Fannie and Freddie. Representative Randy Neugebauer (R – TX), said he was pleasantly surprised by the focus on restoring the mortgage-backed securities market issued without the government’s guarantee. Debate over the future of the mortgage giants is often contentious on Capitol Hill. Republicans consistently criticized last year’s Dodd-Frank financial-overhaul bill for not addressing the fate of Fannie and Freddie. Treasury Secretary Timothy Geithner said that winding down Fannie and Freddie and creating an alternative won’t happen overnight. “Realistically, this is going to take five to seven years,” he said. “We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market.”
The Treasury Department report suggests that Fannie and Freddie purchase loans with smaller outstanding balances, reducing their risk. The report also recommends phasing in a requirement that Fannie and Freddie borrowers make larger downpayments — at least 10 percent. Lastly, the government wants Fannie and Freddie to wind down their own mortgage investment portfolios. In their heyday, Fannie and Freddie were public companies that encouraged home ownership thanks to a Congressional mandate. The companies buy home loans from lenders, which use the money to offer new loans to consumers.
The bad news is that mortgage costs could increase a bit once Fannie and Freddie are phased out. “Over the long run, the cost of a mortgage will rise modestly for the average American homeowner,” Geithner said. “We think it’s very important for the government to continue to play a role, a targeted role” to make certain that “Americans who need help to find a home, to rent a home, or own a home get that help.”
Nor will the process of replacing Fannie and Freddie be easy. Writing in the Wall Street Journal, David Reilly points out that “A return of private capital requires the revival of securitization markets for mortgages not backed by the government since bank balance sheets aren’t big enough to fill the gap”. But 30-year loans in their current form aren’t attractive to investors without a government guarantee. The Treasury implicitly acknowledges the conflict, noting that the less government backing there is for housing finance, the less feasible the 30-year mortgage becomes. It also admits the reward for losing that benefit, and largely removing government from mortgage markets, would be a reduced incentive to invest in housing so that ‘more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets.’ That should be the clear goal of any housing-finance revamp.”
Tags: bailouts, congress, Dodd-Frank financial overhaul bill, Fannie Mae, Freddie Mac, GSE model, House Financial Services subcommittee, mortgage-backed securities, mortgages, Obama administration, President Barack Obama, Public-private housing finance model, Representative Randy Neugebauer, Representative Scott Garrett, Republicans, Timothy Geithner, Treasury Department
Posted in Economics, Financing, General, Residential | No Comments »
Monday, February 21st, 2011
Federal Reserve Chairman Ben Bernanke is knocking heads with Representative Paul Ryan (R-WI), the new chairman of the House Budget Committee, about how to best control inflation while buying billions of dollars worth of Treasury bonds to build up the economy in a process called quantitative easing 2 (QE2). As the nation’s debt climbs to an unprecedented high level, President Obama is in the difficult position of having to forge an agreement with Congress on how high the legal cap on how much money the government can borrow will be. The Republicans who now control Congress say they will consent to an increase in the cap only if President Obama agrees to make significant budget cuts. Ryan has been an outspoken opponent of the Fed’s stimulus policy, which is pumping $600 billion into the economy through purchases of long-term Treasuries. He is concerned that the policy will accelerate inflation, create asset bubbles and reduce the dollar’s value. “My concern is that the cost of the Fed’s current monetary policy…will come to outweigh the perceived benefits,” Ryan said. “We are already witnessing a sharp rise in a variety of key global commodities and basic material prices.”
Bernanke disagreed, saying “The inflation is taking place in emerging markets because that’s where the growth is.” In the United States, he said, “overall inflation is still quite low and longer-term inflation expectations have remained stable.” Bernanke pointed to growth in economies like China, India and Brazil as the real cause of rising prices.
Speaking in a different venue, Treasury Secretary Timothy Geithner expressed confidence that Congress ultimately will raise the debt limit. “I can say this with complete confidence – that the U.S. will meet its obligations, that Congress will act as it always has to make sure we meet those obligations,” Geithner said. “There’s always a little political theater around this.”
Democrats and Republicans remain sharply divided on the issue. “It would be reckless from an economic and financial perspective…to essentially default on our debts and question the creditworthiness and full faith and credit of the United States, correct?” asked Representative Chris Van Hollen (D-MD) “Wouldn’t significant reductions or addressing the short-term spending aspect be good for the market and economy?” asked Representative Scott Garrett (R-NJ).
Representative Ron Paul (R-TX) and a Libertarian characterized Bernanke’s testimony as “cocky”. Paul, a 2008 presidential candidate who is a long-term critic of the Federal Reserve, now has a platform to air his views, thanks to the Republicans winning control of the House. As chairman of the House Domestic Monetary Policy and Technology Subcommittee, Paul called the hearing to examine the impact of the Fed’s policies on job creation and the unemployment rate. Paul has advocated for measures that would review the Federal Reserve or even eliminate it. Additionally, Paul slammed the Fed’s latest $600 billion bond-buying program, saying it and near-zero interest rates haven’t led to job creation in the United States.
Tags: Ben Bernanke, Capitol Hill, congress, Corporate tax rates, economic recovery, Federal Reserve, House Budget Committee, House Domestic Monetary Policy and Technology Subcommittee, inflation, Libertarian, Long-term Treasuries, monetary policy, President Barack Obama, Quantitative easing, Representative Chris Van Hollen, Representative Chris Van Hollen (D-MD), Representative Paul Ryan, Representative Ron Paul, Representative Scott Garrett, Republican-led House, Timothy Geithner, Treasury Department, unemployment rate
Posted in Economics, Financing, General, Green, Office, Residential | No Comments »