Highlights, Lowlights, and Reading Between the Lines of Mortgage News
Mortgage news was dominated by two items this week:
- President George W. Bush signed the mortgage relief bill, designed to help troubled home owners stave off foreclosure
- A prominent home price index reported a 15.8% decline for the year ending May 31, 2008, the biggest year-over-year decline so far
On the surface, the first would seem to be a highlight, and the second a lowlight, of the week’s mortgage and housing news. Reading between the lines, though, reveals that the first item may not be as good as it’s been reported, but the second item may not be as bad.
The Mortgage Relief Bill and Possible Unintended Consequences
Not surprisingly, given its tortuously-long journey through Congress, the mortgage relief bill is multi-faceted and complex. There were, however, two provisions intended to provide short-term support to the housing market. The first is a mechanism for helping troubled home owners refinance their mortgages, as long as their lenders were willing to write down part of the loan balance on houses that have fallen significantly in value. The hope is that stemming the tide foreclosed homes hitting the market will help stabilize housing prices.
The second provision involves providing additional financial support for Fannie Mae and Freddie Mac. This will pump liquidity into the housing market, in the hope of making more new mortgages available.
In short, one provision is designed to slow the supply of houses on the market, while the other is inteneded to stimulate demand. In theory, this should help housing prices. Will it work? As always with economics, there may be unintended consequences.
Regarding the loan write-down-and-refinance scheme, this depends on lenders deciding they are better off writing off part of a loan rather than taking a house in foreclosure. The irony is, if housing prices do rally, those lenders will have less financial incentive to cut their losses rather than simply take possession of homes. At the very least, the process could create a huge paperwork bottleneck with lenders and government agencies which would slow the turnaround of these mortgage refinancings. In short, this will not be a clean fix to the foreclosure problem.
As for pumping money into Fannie Mae and Freddie Mac, this should provide short-term support for the mortgage market, but at a long-term cost. The mounting Federal deficit will create upward pressure on interest rates, while increased government oversight will make lending standards tougher. In short, conditions for future borrowers may get tougher rather than easier.
The Bright Side of the Housing Slump
While it was widely reported that the Standard & Poors/Case-Shiller home-price index just logged its worst year-over-year decline, a closer look at the underlying numbers shows that the pace of decline might at least be slowing. The steepest monthly declines took place between November of last year and this past March. The pace of decline then slowed in each of the past two months reported. While a decline is still a decline, focusing on trends in the rate of change is often the best way to spot the makings of a turnaround.
On balance then, the mortgage bill does not promise great things for new borrowers, while current home prices remain cheap. This means there is no reason for potential home buyers to hold off from shopping now.
Tags: 2008, borrowers, fannie mae, foreclosure, freddie mac, housing prices, interest rates, lender, mortgage, mortgage news, refinance, refinancing
