Fed Pushes Housing into Stronger Hands

Just like the FDIC, the Federal Reserve and Treasury pushed weaker banks into the hands of stronger banks. Now they are trying to move houses from weaker (read defaulted) borrowers to the strongest borrowers. Treasury Secretary Paulson has placed undue obstacles and complications in every program to mitigate foreclosures at the same time the Fed is aggressively trying to push down rates for the strongest borrowers. Even FHA (Ginnie Mae) requires at least a small down payment and substantial fees.

Bloomberg's “U.S. Banks Offer Mortgage Rates Below 5% as Fed Buys Securities” reports that with excellent credit and 20% down, JP Morgan Chase (JPM) is originating 30-year fixed rate mortgages for 4.75%, Wells Fargo (WFC) for 4.875%, and Bank of America (BAC) for 5%. Bloomberg attributes these low mortgage rates to the Federal Reserve’s program to purchase $100B in Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae debt, along with $500B in direct purchases of their highest rated 30-year fixed rate MBS.

In a second article, Bloomberg's “No Recovery for Real Estate as Speculators Dominate Sales” reports that speculators are creating most of the demand for foreclosed properties:

“You don’t have it in strong hands, you have flippers,” said Shiller, who helped create the S&P/Case Shiller real estate price indexes. “These speculators are preventing the market from crashing now, and when they get out it could fall again.”

“We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” said Stiglitz, a Columbia University professor of economics. “We could see a double-dip in the housing recession if that happens.”

The government is telling us that it is of paramount importance to get properties in the hands of stable homeowners. Regardless of the economics of foreclosure prevention, it is better to weed out the weak and promote the strong. Only by moving properties to strong owners will the inventory be reduced and a floor in housing prices established. This sounds just like the argument against weak banks that prolonged the previous Japanese route to recovery.

The Ft. Lauderdale Sun-Sentinel “Builders want housing aid in rescue package” reports that desperate home builders don’t care whose hands their homes wind up in as long as they are sold. They want subsidies to push mortgage rate below 3% and a tax credit of up to $22,000 for home purchases. The builders are not specific on which buyers they want to qualify. Remember Paulson said that the cost of bringing mortgage rates to 4% would be astronomical.

This leads me to conclude that the most economical plan to stabilize housing is to take from the poor and give to the rich, in a reverse Robin Hood. In other words, take from the imprudent and give to the prudent. As the Bernie Madoff episode taught us, even the wealthy can become quite imprudent.

Disclosures: Author is long BAC, FNM, FRE and WFC.

Comments

[Ishortyou:]

They need to enact a federal emergency band on new home construction or starts till the invenotories drop down to or are close to zero, at least for a couple of years if they want to be serious about it.

Jan 09 07:31 AM

[Ishortyou:]

I meant bann.

Jan 09 07:31 AM

[me3tv:]

a BANN on building has merit, but the downside is a HUGE explosion in unemployed contractors for that period. The "infrastructure" investment by the feds (taxpayers) is supposed to mitigate the already sucking home builder market. Some homes in some markets will still need to be constructed but the low profit in competition with existing homes will keep the new construction suppressed anyway.

Jan 09 09:33 AM

[Econ 101:]

Let the prices fall!!!! That will clear the market and provide more qualified people. The price of housing is too high relative to income, and income is falling. Quit subsidizing speculators by letting prices fall. They will go BK and so will the blood sucking, Paulson cronie, wall street banks. This country neeeds smaller, closer to home S&L's that judge people on more than their fico score.

Deflation would kill the big WS guys, hurt political contributions to politicians, so it wont happen. Look for hyper inflation in spring 2010.

Finally ask yourself why the biggest left winger in the US congress,Nancy Pelosi, pushed for the bailout for wall street. Because they are all (Republicans & Democrats) paid off, on the take, corrupt.

Jan 09 12:09 PM

[thecondoguy1:]

Ban, just ban guys.....................

Jan 09 01:02 PM

[Smalltownba...:]

Ban building? Which communist Nation are you guys from. If I own 20 acres and want to build a house on it why should you or some government agency have the right to tell me I cannot build. Get real. New housing starts that continue are in areas not impacted by the oversupply.

I am in an area that is overbuilt but new custome homes are still being built. I even have employees who are currently having homes built. Most new home starts are in markets not impacted by the oversupply.

The speculators that I see buying are buying with cash, most of which probably used to be in the stock market. They have taken that cash and feel that they can purchase good homes at great prices, hold them for a few years and make some money. Instead of decrying this practice you should be celebrating it as the makings of a potential bottom to prices. The foreclosure is not driving values down, the inventory is. If the inventory is purchased and becomes rental housing it will help to slow the fall of home prices.

I think your entire premise for this article is flawed.

Jan 09 01:56 PM

[Tony Petroski:]

Bann, band or ban is a baad idea.
I do think the government could stop subsidizing "affordable housing." I own property in an area where every block has empty boarded-up buildings that could be occupied very affordably, but on those same blocks the government is subsidizing at very high cost the construction of properties that will be rented to a few lucky winners of the government-run charities.

Jan 09 03:24 PM