Confidence Must Be Gained For Home Market Recovery (Market Forecast)
by September 22, 2008 12:00 am 61 views
In late July, President Bush quietly signed a housing bill intended to help struggling homeowners.
This piece of legislation is regarded as the most significant housing bill in decades.
The bill includes $300 billion in new loan authority from the government to back cheaper mortgages for troubled homeowners; $3.9 billion for communities to fix up foreclosed properties; $15 billion in tax cuts, including an expanded low-income housing tax credit of up to $7,500 (which is to be repaid) for some first-time buyers.
The number of homeowners who could lose their homes by the end of 2009 is estimated by some to be around 2.8 million.
The bill also established the Federal Housing Finance Agency which was supposed to help the ailing government sponsored enterprises (GSEs) Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These GSEs make mortgage loans, buy loans and repackage loans for resale via mortgage-backed securities. Their primary function was to provide liquidity to the mortgage market to ensure that lending institutions (banks, savings and loan, credit unions, etc) have enough funds to lend to home buyers.
They performed this function as a publicly owned entity with the “implied” backing (guarantee) of the U.S. Government. Whether or not this was a good business model is a topic for another day. The fact was, these institutions guarantee about half of the U.S.’s $12 trillion mortgage market. As a result, they were particularly affected by the housing market downturn and credit crunch that began in 2007.
With their stock prices falling and questions circling about their solvency, the Federal Government stepped in again to try and stabilize the credit and housing markets on Sept. 7 by announcing Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA … in other words, they were taken over and nationalized.
Will this bill and the Fannie/Freddie takeover right all the evils of the recent real estate craze and financial system’s wrongs?
Probably not, but hopefully, it will keep hundreds of thousands of additional homes from becoming vacant by decreasing foreclosures and help spur some home buying by making it more affordable for people to purchase through the aided financing and tax credit. This in turn should add some stability to home prices and hopefully buoy confidence in home owners and lenders alike which could have some positive ripple effects on the economy.
The bill is expected to help about 400,000 people having trouble making their payments by allowing them to trade their current loans for new, more affordable mortgages through the Federal Housing Administration.
At first blush it certainly seems like a bailout and that all the hard working, tax paying Americans will once again pay for the gross misjudgment of a few. It wouldn’t be the first time this has happened … think back to Long Term Capital Management in 1998, the S&L crisis of the 80s, Chrysler 1979, etc.
Unfortunately there are times when corporations, citizens and the world look to our government (unarguably the super power of the world) to step up and right the wrongs of a few for the sake of many.
I’m not sure if this bill will have the intended effect, but I am confident that stabilizing the housing market and financial system must take place before the economy can get back to a firm footing.
With the additional burden of high energy prices and rising inflation overall plaguing consumers, keeping people in their homes and instilling a little confidence in them will go along way toward getting us out of this mess.
Whether or not the current bill will be the most cost effective way of doing that will never be known for certain.
So what does all this mean for your investments? Well, the stock market is a forward-looking beast and by the time we all know we’re out of the woods, a great deal of progress and money has been made in the financial markets.
It is important to occasionally revisit your investment program even in times like these when it’s not too pleasant opening that monthly statement.
High quality, well-run corporations can withstand downturns like we’re having today and will prosper handsomely when things pick back up … and they will eventually.
Fear is what typically drives people to make the biggest investment mistakes, whether it’s fear of missing out on the next great thing (think tech bubble) or fear of losing everything (sell out of the stock market at the low).
Patience and time are required for all good investments.
(Kerry Watkins-Bradley, CFA, MBA, is equity portfolio manager at Garrison Financial in Fayetteville. E-mail her at [email protected].)