Differing Approaches to Spur the Real Estate Marker


By: Tim K

On October 20, Daniel Tarullo, the Federal Reserve Board Governor, made his first speech focusing solely on economic outlook since joining the Fed in 2009. In that speech, Tarullo said, “housing continues to hang like an albatross around the necks of homeowners and the economy as a whole.” The Fed, under Tarullo’s leadership and guidance, has advocated for the Fed to increase its mortgage bond position. I am no economist and cannot weigh on the merits of such a plan, but it is nice to see members of government indicating that they are thinking about different approaches to the housing mess.

Elected officials have different ideas as to how to save housing. In discussions with bank officials about a potential multi-billion dollar settlement for alleged questionable foreclosure practices, the current plan being discussed involves allowing homeowners who are “underwater,” or who owe more on their mortgage than their house is currently worth, to refinance their mortgage if they have been making consistent payments. (Such homeowners are typically unable to refinance because of the depressed home price; in the last 5 years the average home price has decreased by 30%.) The refinancing would only be available on mortgages owned by the banks, which is estimated at around 20%. (Who owns the rest of the mortgages? Investors, in the form of mortgage-backed securities.)

This plan has been vehemently opposed by the banks, as it would put a major dent in the banks’ bottom line. The word on the Street is that the banks would only consider such a refinancing plan if it prevented any further litigation to be filed against them for the dubious foreclosure practices which cut many corners and may have evicted homeowners who legally should have been allowed to stay in their homes. (I believe the appropriate response to the apprehension of the banks’ is: “Maybe you should have thought twice about having your lawyers “robo-sign” documents and evict homeowners who had the right to stay in their home.”)

What is new about these talks is that they were attended by Housing and Urban Development (“HUD”) Secretary Shaun Donovan.  Mr. Donovan is the highest-profile official in the Obama administration to participate in the talks so far. Mr. Donovan’s presence may indicate a willingness from the Obama administration to have some sort of plan in place for the election season. The administration must be confident that the refinancing will provide the economy a boost. However, as one can imagine the Republican candidate for President will lambast Mr. Obama for economic mismanagement and float other ideas as to what should have been done. Moreover, such a move is a perilous political move, as it will come at a time where Mr. Obama has attempted to sidle with the Occupy Wall Street movement; he must be sure that refinancing will provide a jumpstart to the economy, or he will have a lot of explaining to do.

The refinancing issue with the banks is separate from another plan by the Obama administration which calls for an expansion of an existing federal program that allows homeowners to refinance, even if they have little to no equity, so long as their loans are backed by Fannie Mae and Freddie Mac, the government-controlled housing lenders.

The three initiatives from different arms of the federal government show just how important housing is to the overall recovery of the economy.

In a strange twist to the “What to do with Housing” debate, new empirical evidence shows that housing inventories have actually dwindled in the past year, to the point that the amount of homes listed for sale is down 20% as compared to last year.  The result:  some pockets of the country actually have a shortage of housing inventory.

Regardless, existing home sales dropped in September.  Paul Dales, senior U.S. economist at Capital Economics, says “home sales are low because demand is being constrained by the weak economy and the inability of many households to qualify for a new mortgage.” As it turns out, the pockets of the country with low housing supplies are likely that way because people have pulled their house off the market, unable to sell.  Even with fewer homes, demand is so tepid that there are still less deals being made.


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Fordham Journal of Corporate & Financial Law