Proposal to permanently end the current mortgage crisis by using the free market system aka “The RC Stabilization Act"
All Freddie Mac and Fanny Mae Mortgages originated between Jan 1, 2002 thru Dec. of 2007 that are interest only or arm loans will be placed into a separate category bundle.
1) Their original teaser rate will not change. It will last for the life of the note.
2) All these loans will be converted to 40 yr loans
3) All these loans will have a call feature at 30yrs by the US Government at current market value at the time of exercise of the call feature, but no greater than 100% of the balance of the loan on the note that is left.
4) At the end of 20 years the note may increase 1% point above the original teaser rate.
5)All of these loans will be fully assumable by any buyer based on the original loan requirements.
6) All the interest paid on these notes will be federal tax free to the note holder be it a private individual or any entity or any US Corp.
7) States that agree to making these notes state tax free by a simple majority of their legislator may participate in this program.
8) The interest on these note will also be state tax free to the holder of these notes.
9) All these notes can be bought and sold at any time by any Private individual or entity.
10) All these notes must be serviced by a note service co. on an approved list by the federal gov’t. no exception.
11) All participating states must approve their participation no longer than 45 days after this program is enacted by the federal gov’t.
12) All these Loans may be paid off at any time without any prepayment penalty.
13) The original sale of these notes must be done on an auction basis thru the top 40 stock and bond dealers on the US stock markets and by the top 40 US banks and The US Treasury in the US. Consequent trading may only be done thru all the same licensed and noted companies on the NYSE, NASD and US Chartered Banks . All Trades must be fully disclosed and reported to the NYSE, NASD within 20 minutes of a transaction.
14) The US gov’t must sell thru all the above entities at a minimum, increments of $25,000. Pieces of these bundles to private US Citizens, or individuals just like treasuries. No fee in excess of typical US Treasury fees may be charged to buyers at the initial auction of every bundle.
15) The US federal gov’t must guarantee the right by private individual public participation in the auction by individual US Citizens’ up to a 25 % priority on every bundle sold.
16)Existing note holders may hold on to their notes under all the above terms and must notify the payees of the change in the note rate back to its original rate within 30 days of the passing of the stabilization Act.
17) Existing note holders may transfer the ownership only under a sale thru the existing trading scenario as described above.
18) Mtortgage Service companies will manage, service and foreclose on properties that are in default should the mortgage payee still not be able to perform on the original teaser rate of each note. Starting 90 days after the Stabilization Act is implemented. The Mtge. Service Co.’s may appoint, and hire the necessary individuals to sell the properties as they always do. All mortgages on every property even in foreclosure can be assumed by any buyer under the original rates and terms and fees. A maximum transfer fee of 1% of the balance of mortgage will be allowed.
19) This proposal was originated in order to Stabilize the mortgage loan market. It is designed to encourage foreign and domestic investors to invest in mortgage backed securities by stopping all foreclosures in one move. All foreclosures will be halted for a 60 day time period to implement the above plan and notify all mortgage payees and all mortgage holders.
New report had optimistic prospects
Sunday, June 29, 2008 @ 2:23:00 PM
By Alexis McGee, Co-Founder and President of ForeclosureS.com is both architect and teacher of their exclusive investor learning programs and author of The ForeclosureS.com Guide books (Wiley 2007, 2008).
FREE! Don’t Miss Out – New Foreclosure Investor Webinar & Conference Call – “Make Honest and Ethical Profits Now!” LIVE Wednesday, June 18th, 2008, 6pm Pacific (9pm Eastern). Regularly $19 — NOW FREE! Hurry Space is LIMITED! MORE HERE.
A new report from Harvard just came out “The State of the Nations Housing 2008″ that I found very interesting. Let me share the highlights with you here. Starting with the good news — drastic production cuts and deep price discounts in 2005-2007 helped shrink the inventory of unsold new homes from a mid-2006 peak of more than 570,000 to less than 500,000 in early 2008. But the number of homes entering foreclosure nearly doubled to 1.3 million last year, and vacant homes for sale rose 46 percent over two years, to 2.12 million.
This report is more optimistic about medium- to long-term prospects. It estimates that unless there’s a serious, prolonged economic decline or a marked cutback in immigration, the nation will gain 14.4 million new households between 2010 and 2020, compared with 12.6 million between 1995 and 2005.
“Until the number of vacant for-sale units on the market falls enough to bring vacancy rates back down, house prices will remain under pressure,” the report says. “Working off the oversupply will require some combination of the following: housing starts fall even further; prices decline enough to bring out new bargain-seeking buyers; interest rates drop enough to improve affordability; job growth improves; consumer confidence returns; and mortgage credit again becomes more widely available.”
“At some point demand will bounce back,” Retsinas said in a press release announcing the release of the report. “Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability.”
If the economy slips into a severe recession, the prolonged contraction could drive down the sustainable level of housing demand by slowing the loss of older units, forcing more households to double up, and reducing sales of second homes, the report said. But in the case of a mild downturn, which most economists expect, the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover.
The boom-bust housing cycle has been reflected in the home-ownership rate. From 1994 to 2004, the home-ownership rate surged by five percentage points, peaking at 69 percent. Since then, home-ownership rates have fallen back for most groups, including a nearly two-point drop among black households and a 1.4-point drop among young households. The number of renter households increased by more than 2 million from 2004 to 2007, lowering the national home-ownership rate to 68.1 percent.
Once the oversupply of housing is worked off and home prices start to recover, the use of automated underwriting tools, a return to more traditional mortgage products, and the strength of underlying demand should put the number of homeowners back on the rise, the report said.
Although the short-term prospects for a recovery remain uncertain, in the long run the downturn is unlikely to slow down the creation of new households. The report projected that minority household growth among 35- to 64-year-olds should remain strong in 2010-2020, while the number of white middle-aged households will begin to decline after 2010 as baby boomers reach retirement age. People living alone are expected to account for 36 percent of household growth between 2010 and 2020, and 75 percent of the 5.3 million projected increase in single-person households will be among those 65 and older.
This is all really very helpful information — if you know how to use it to buy low and sell for profits in today market. That is why I spend time on this and more economic and housing data every month in my FREE Webinar and Conference Call for new foreclosure buyers “Make Honest and Ethical Foreclosure Profits NOW” on July 16th at 6pm Pacific. Register Early as we always fill up quickly! MORE HERE.
The Housing Crisis Is Over
By CYRIL MOULLE-BERTEAUXMay 6, 2008; The Wall Street Journal Page A23
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won’t happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.
Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.
Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much. Read Full Story
2 charged on Wall Street in mortgage meltdown
By TOM HAYS, Associated Press Writer Thu Jun 19, 7:13 PM ET
Yahoo News
NEW YORK – Two former Bear Stearns hedge fund managers were hauled into jail Thursday and charged with lying to investors about the collapse of the subprime mortgage market, perhaps signaling the start of a wave of prosecutions arising from the housing meltdown.
Ralph Cioffi and Matthew Tannin were accused of encouraging investors to stay in their hedge funds, heavily exposed to subprime mortgages, even as they knew the credit market was in serious trouble.
They were indicted on conspiracy and fraud counts, the first criminal charges to hit Wall Street in the housing market meltdown.
The eventual implosion of their two hedge funds cost investors $1.8 billion and started the domino effect that led the demise of Bear Stearns itself, which barely avoided bankruptcy in a rescue buyout by JP Morgan Chase & Co. Click Here to Read Full Story
Short sale & consequences
Investors in second or multiple homes stand to be among the biggest losers from the housing downturn. That’s because proposed mortgage bailout programs don’t address second homes and investment properties. Many owners of multiple properties don’t realize that investments they thought would help them build long-term wealth may in fact leave them in bankruptcy and facing a sizeable tax debt.
MAKING SENSE OF THE STORY FOR CONSUMERS
- Homeowners who borrowed against the value of their second home, or who financed the purchase of their second home and subsequent homes by pledging their primary home or other properties as security, may be liable for taxes on the difference in value should they sell any of their properties for a price less than the value owed on the mortgage.
- Under the Mortgage Forgiveness Debt Relief Act, a homeowner doesn’t have to pay taxes on forgiven debt if the collateral behind the mortgage is owner-occupied. That provision doesn’t apply to a growing number of homeowners renting out their second home or investment property. Of some 7.5 million vacation homes, only about 10 percent are considered owner-occupied, according to the NATIONAL ASSOCIATION of REALTORS® (NAR). Many of these homeowners borrowed against the ever-increasing (or so it seemed) value of these properties to finance improvements or to buy other properties.
- There may be a way out for some, one bankruptcy lawyer counsels: Get a lender to agree that foreclosure “fully satisfies all obligations under the loan.” That might protect the seller from having to pay taxes on the forgiven debt – although one attorney said, “I sure don’t want to be the one litigating it” in court.
To read the full story, please click here:http://www.nytimes.com/2008/05/30/business/30tax.html?th&emc=th
To get your short sale handled by professional team of real estate consultants and foreclosure therapists call Best Hollywood Homes Team at 310-499-1305. We provide free & no obligation consultation based on your specific situation.
Property Tax SAVINGS
GOOD NEWS…. For anyone that purchased property between July 1, 2004 and June 30, 2007. Los Angeles County will be sending a letter to homeowners a value reduction for their properties and taxes….
Los Angeles County Assessor Rick Auerbach today announced completion of a decline in value review of homes in Los Angeles County. Auerbach said that due to the declining real estate market, it was his responsibility to review values to make sure homes are properly assessed.
“We looked at homes and condominiums that were purchased between July 1, 2004 and June 30, 2007, based on our analysis of market trends in Los Angeles County,” Auerbach said. “The review included 318,000 homes and condos. Our analysis will result in lower assessments on 128,000 homes and condos and will be reflected on the tax bills to be issued in October.”
The average reduction in assessed value is about $73,000, he added, amounting to an average property tax savings of approximately $750.
“In addition, this review will eliminate the need for many taxpayers to go through the formal appeal process,” Auerbach said. The 128,000 homeowners who will be receiving a value reduction will be notified in writing by June 30 of this year. If they disagree with the amount of the reduction they should contact the nearest Assessor’s District Office and discuss the results. If owners still disagree with the value, they may file an appeal with the county’s Assessment Appeals Board. The deadline for filing an assessment appeal is November 30.
Homeowners who purchased their properties outside of the time period for the review (July 1, 2004 to June 30, 2007) and believe that their property is assessed above its actual value as of January 1, 2008, should file the simple, one-page Decline-in-Value application. The form can be downloaded from the Assessor’s Website at http://assessor.lacounty.gov or an application can be requested by calling 888-807-2111.
have a WONDERFUL day
Louise Oshiro
Cal Counties Title Nation
New Email: louise@louise4title.com
(818) 439-7008
(310) 490-0003
Weekly Mortgage Market Update from The OCD Group
For the week of Jun 02, 2008 — Vol. 6, Issue 23
Last Week in Review
“INFLATION IS AS VIOLENT AS A MUGGER, AS FRIGHTENING AS AN ARMED ROBBER, AND AS DEADLY AS A HIT MAN.” ~ Ronald Reagan. And although you might not describe the effects of inflation in such strong terms yourself…rest assured that the effects of inflation have crept into your home, your gas tank and your wallet. And inflation is also the nemesis of Bonds and therefore home loan rates, because just like inflation erodes the value of the dollars you spend, inflation erodes the value of the fixed return a Bond provides. And last week, Bond pricing worsened on news of inflation, causing home loan rates to move higher by about .25% across the board and reaching the highest levels seen in weeks.
The week was shortened by the Memorial Day holiday, but right out of the gates, inflation concerns abounded. The Consumer Confidence Report indicated that consumer inflation expectations are at an all-time high…meaning that consumers are seeing inflation as a real threat to their own financial situation. Rising energy costs and worldwide inflation fears continued to pummel Bonds lower – in fact, so low that they moved below a tough technical floor of support at the 200-Day Moving Average. This is important because Bonds have made a decisive cross over the 200-day Moving Average on only three separate occasions within the past three years. This means that barring a timely reversal, we are likely seeing a shift in the market towards higher home loan rates.
Friday brought a little good news on inflation, as the Core Personal Consumption Expenditure (PCE) Index showed that inflation does remain within the Fed’s comfort zone. While Bonds and home loan rates improved somewhat on the news, the trend for the week was definitely worse overall, as the big picture on inflation cost Bonds and home loan rates some hard earned ground.
LOOKING FORWARD TO YOUR STIMULUS CHECK…AND WISHING THE SIZE OF IT COULD BE “INFLATED?” RETAILERS HAVE COOKED UP SOME INTERESTING SPECIALS TO DO JUST THAT, SHOULD YOU DECIDE TO SPEND YOUR CHECK ON THEIR GOODS OR SERVICES. TAKE A LOOK AT THIS WEEK’S MORTGAGE MARKET VIEW FOR SOME EXAMPLES OF WHAT CREATIVE RETAILERS HAVE IN STORE FOR YOU.
Forecast for the Week
This coming week, one economic report in particular bears inflated significance…Friday’s release of the infamous monthly Jobs Report. It will reveal, among many other things, the number of jobs lost or gained during the month of May. Last month’s Jobs Report indicated that 20,000 jobs were lost in April, and while this was better than the expected job losses of 75,000, it is possible that the reported number understated the actual number of jobs lost, due to how the Department of Labor averages their count. And part of each month’s report is “revisions” to the several prior months’ numbers…which this could be quite a wild card for Bonds and home loan rates.
Last month’s Jobs Report, which was indeed more positive than expected, caused Bonds to fall a whopping 134bp in a matter of minutes, and home loan rates worsened quickly. Why? Because even though the news wasn’t great, it sure was better than anticipated…and this caused money to flow out of Bonds, and into Stocks…which caused Bond prices and home loan rates to worsen. This week’s Jobs Report could sure be another mover, and if the report or revisions indicate positive news on the jobs front, home loan rates will likely worsen in response.
Remember when Bond prices move higher, home loan rates move lower…and vice versa. And as you can see in the chart below, Bonds moved lower for most of the week, and actually closed below an important technical level at the 200-day Moving Average. This is a very important level, as it can act as either a very strong floor of support helping Bond prices not to fall below it…or as an equally strong ceiling of resistance, preventing Bonds and home loan rates from improving above it. And with Bonds currently having fallen beneath it, I’ll be watching closely this week to see if Bonds have indeed fallen and can’t get up…or if they can break above that tough level later this week and help home loan rates improve.
The Mortgage Market View…
Retailers Looking For Some “Stimulus”…
According to a recent poll on how consumers intend to spend their stimulus checks, 19% of consumers plan on using their economic stimulus check for a special purchase, and 23% plan to use their check for everyday expenses. The rest…well, 36% say they will pay down debt and 22% say they will put it into savings. But will the check burn a hole through their pockets?
Maybe so, particularly with the “stimulus check” specials that many retailers have come up with, offering bonuses and incentives for people who spend their “stimulus” dollars with them. Here are some examples, in case you want to take advantage of any offers:
Sears. If you use your stimulus check to purchase a gift card, you receive an additional gift card worth 10% of your check’s value. This offer is also good at Kmart and Lands’ End.
Kroger. Between now and July 31, 2008, you can exchange your tax refund or economic stimulus check for a Kroger gift card with an extra $30.00 (for $300.00 checks), $60.00 (for $600.00 checks) or $120.00 (for $1,200.00 checks) added to it. The program is available throughout Kroger stores nationwide – including Kroger, Baker’s, City Market, Dillons, Fred Meyer, Fry’s, Gerbes, Hilander, Jay C, King Soopers, Owen’s, Pay Less, Ralphs, Smith’s and QFC stores.
Home Depot. To encourage consumers to invest their stimulus check in their homes through energy efficient products and services, the retailer is offering special values on energy-efficient products such as light bulbs and home appliances through the summer.
Radio Shack. The retailer will cash your check and give you 10% off on any purchase above $50, and then give you the difference as a prepaid MasterCard that can be used anywhere that takes MasterCard.
Domino’s Pizza. Although you don’t need to use your stimulus check for purchase, Domino’s is getting into the spirit of economic stimulus, offering a “recession-busting” special of three pizzas for $12.00. According to the company’s press release, “While you’re feeding the economy with your special refund check, let it feed you back.”
These are just some of the promotions that retailers are currently offering, and more deals are likely on the way. If there’s something you want to use part of your stimulus check for, do your homework and take advantage of the specials that are out there. And if you do intend to pay down debt with the check, feel free to give me a call to discuss which debt would make most sense to reduce!
Ernest Tepman
President
The OCD Group Inc.
Los Angeles: 800-963-4623
San Diego: 877-863-4623
E-Mail: marketupdate@theocdgroup.com
SoCal home sales jump in April but still lag year-ago period
Southern California homebuyers stepped off the sidelines in April, snatching up foreclosures and homes priced under $500,000 at a rate that was 22 percent higher than in March but down 19 percent from April 2007 and the lowest level since 1995, according to DataQuick Information Services.
MAKING SENSE OF THE STORY FOR CONSUMERS
The median home price for the six-county region was $385,000, unchanged from March but down 24 percent from an April 2007 peak of $505,000. April marked the first time in eight months that the median price did not decline.
Sales were strongest in areas hit hardest by foreclosures: Riverside County (where sales increased month to month for the first time in two years), Lancaster, Chula Vista, Anaheim, Lake Forest and Victorville experienced the strongest rebounds. Two-thirds of homes sold during the month in Los Angeles, Orange, Ventura, San Bernardino, Riverside and San Diego counties were priced under $500,000. About 38 percent of the homes sold were in foreclosure at some point during the previous year, up only 2 percent from March but sharply higher than the 5 percent reported a year ago. In Riverside County, 53 percent of sales involved troubled properties.
The credit crunch, potential for a recession, and uncertainty over when foreclosures will peak caused DataQuick analysts to remain cautious. Lack of financing for high-value homes continues to be an issue and could forestall a recovery if the trend persists. In April, only 15 percent of Southern California home loans were above $417,000, down sharply from the same period a year ago.
To read the full story, please click here:
http://ap.google.com/article/ALeqM5h_DkmV9N0qyf2vfd5bqwsVnBh0JgD90OUO9G0
Legislation to help homeowners avoid foreclosure
The U.S. Senate said it has agreed on legislation to help homeowners avoid foreclosure by creating an affordable housing fund that will enable Fannie Mae and Freddie Mac to offer about $500 billion in foreclosure rescue funding in the program’s first year. Observers expressed optimism that the Bush administration will support the effort because it does not involve direct funding by taxpayers. The Senate proposal would tighten regulation of Fannie Mae and Freddie Mac and create a new regulator, the Federal Housing Finance Agency, which would be empowered to take action in the event the two quasi-government companies experience future liquidity problems.
MAKING SENSE OF THE STORY FOR CONSUMERS
Earlier this month, the House approved a similar bill. Under both plans, lenders would be allowed to limit their foreclosure losses by reducing the principal balance of loans to homeowners at risk of default and foreclosure. The primary beneficiaries would be homeowners with certain kinds of high-cost adjustable rate mortgages, who would be allowed to refinance to a more stable fixed-rate mortgage insured by the Federal Housing Administration.
Under the House bill, it is estimated that as many as 500,000 mortgages may be refinanced over the next five years at a cost to taxpayers of $2.7 billion. The Senate version, which would help the same number of borrowers, shortens the plan to three years and reduces the cost to about $500 million, with costs to come from a new Affordable Housing Fund that would collect about half a cent on every dollar in mortgages purchased in the secondary market by Fannie Mae and Freddie Mac.
The bill also would set a new Fannie Mae/Freddie Mac conforming loan limit of approximately $550,000 in high-cost markets, up from the current $417,000 limit. The limit has been temporarily increased to $729,250 in the most expensive markets as part of February’s economic stimulus package.
To read the full story, please click here:
http://www.nytimes.com/2008/05/20/business/20housing.html?_r=1&th&emc=th&oref=slogin
The Housing Crisis Is Over
From The Wall Street Journal
By CYRIL MOULLE-BERTEAUX May 6, 2008; Page A23
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won’t happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.
Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.
Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.
Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.
Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.
The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.
Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.
Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.
Many pundits claim that house prices need to fall another 30% to bring them back in line with where they’ve been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.
Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one’s income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today’s house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.
This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.
When the rate of house-price declines halves, there will be a wholesale shift in markets’ perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.
More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.
A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets’ perception of risk related to housing, the financial system, and the economy.
We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.
