Maureen Megowan's Blog

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What Happens when Uncle Sam stops buying mortgages???

Currently, 85% of new mortgages are guaranteed by Government backed entities( FHA, FNMA, GNMA, Freddie Mac) and the Fed buys 80% of the securities into which these government backed mortgages are packaged.  This dominance of the Fed and the reliance upon the Government to fund mortgages can not last forever. The Federal Reserve's $1.25 trillion special program to buy Fannie Mae and Freddie Mac securities is two-thirds complete and is scheduled to close at the end of the year. What happens then???

More than half of the country's home mortgages are now being originated by only 3 banks; Wells Fargo, Banik of America, and J.P. Morgan Chase. The problem is that these banks are acting only as originators of mortgages, and immediately sell most of the mortgages that they create to Fannie Mae and Freddie Mac and hold very few of them on their own balance sheets. Combined, the 3 dominant banks actually held 3.5 % fewer mortgages on their balance sheets in the firs half of 2009. (note: the statistics for this post came from a wall street journal article U.S. Bets the House - WSJ.com )

This strategy of the banks to sell almost all of their mortgages has fed their bottom line with strong loan origination and mortgage servicing fees with very little risk. The fact that banks are unwilling to hold mortgages for their own investment demonstrates that the interest rates of these mortgages are artificially low , driven down by the government purchase of them, and the banks are thus unwilling to invest their own money in them.

When the government stops funding mortgages, where will the capital come from? In the recent past, capital for mortgages came from mortgage backed securities funded by investors through Wall Street. This type of security is now dead. Investment by private capital ( banks, individual investors, and pension funds ) will only happen if interest rates are allowed to increase to a level to compensate investors for the perceived risk in these investments.

Because of this, I believe that there is a very real risk of interest rates escalating substantially after the first of the year, especially if signs of inflation start to emerge as the economy strengthens. Because of this, I have been encouraging buyers to buy now, if they are buying a home for the long term, as this may be the best time in the foreseeable future to buy a home.

 

For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at http://www.maureenmegowan.com . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

Comment balloon 91 commentsMaureen Megowan • September 20 2009 02:36PM

Comments

Maureen,

Thanks for your comments. I have been working with my buyers who don't yet believe our market has hit bottom. The thought of higher interest rates does not seem to be a factor in today's thinking. They don't understand a higher interest rate can cost more than if prices drop a few thousand more.

Best of luck to us all as we prepare for the next challange.

Posted by Linda Powers, On the Outer Banks (Resort Realty - Duck) almost 9 years ago

Maureen, thank you so much for writing about this.

Posted by Jim Crawford, Jim Crawford Atlanta Best Listing Agents & REALTOR (RE/MAX Paramount Properties) almost 9 years ago

Absolutely correct. And a new huge wave of foreclosures of those who hang by the thread with their ARMs. I can't believe the degree of stupidity and blindness in this country of ours.

Posted by Sal Antsipenka almost 9 years ago

Hi Maureen... this was a very well written post and worthy of being featured.  You presented not only facts, but also illuminated issues with your questions to the reader and offered insight to your opinion.  WAY TO GO!!!  Congrats on your first Gold Star!

Posted by Steve Shatsky almost 9 years ago

Hi Maureen. I am so glad to see that your post is featured. ~ Lana

Posted by Lana Robbins Realtor ® Licensed Real Estate Broker, Licensed in Florida and Washington (Aloha Kai Real Estate) almost 9 years ago

Maureen:

I can not agree with you more.  Interest rates will in my opinion be going up shortly.  While that home you wanted may be going down in price, the mortgage will be more expensive.  

Posted by Bob Force (REALTOR®), The FORCE in Maryland Real Estate (Weichert Realtor - New Colony) almost 9 years ago

No question, we will see run away interest rates. Even if prices drop another 40% which they could interest rates have the potential to raise by 100+% 

Posted by Jeff Cole, Homes For Sale 360-316-1177 (The Cole Group) almost 9 years ago

Real Estate will be sold in spite of interest rates.  When a buyer is ready to buy, they will buy.  Period.

Posted by Kate Bourland, Onlilne Marketing Mobile Marketing (Marketing with Kate) almost 9 years ago

Maureen - I told you you would get a feature when you least expect it, great post and congrats on the feature!

Vegas Bob

Posted by Robert Vegas Bob Swetz, Las Vegas Henderson Homes for Sale (Realty ONE Group) almost 9 years ago

I saw a news story yesterday where someone in Congress is trying to start up a similar version of the (CRA) Community Reinvestment Act.  This is crazy...unqualified consumers can't start being given loans again.  This was one of the problems from before.  DON'T GIVE OUT MORTGAGES TO PEOPLE CAN'T AFFORD THEM.  It's going to be a nightmare!  Why can't anyone in Congress get their act together and stand up for what's right.  I've written to my Congressmen and women...please take time to share your thoughts with them too.

Posted by Dan Weis, CincinnatiRealEstateGuy.com (Comey & Shepherd Realtors) almost 9 years ago

You're right Maureen. Once the Fed steps out (I'll have to check, but I believe this will be around end of Q1 2010) the only way to attract private investment into the MBS market is to offer more attractive yield, i.e. higher rates for borrowers. I see this coming by summer next year. And if we have inflation as well (low demand for treasury bonds, and high yield) then mortgage backed securities will again have to offer a better yield to compete with treasuries. 

The interesting times aren't over yet.

Simon

Posted by Simon Smart (Sunstreet Mortgage, Arizona) almost 9 years ago

I doubt Uncle Sam is going to jump ship . . . too invested as they are.  There is a lot to be made in the mortgage biz, that's why the Feds got involved.  It's not to do anything for the citizenary.  Governments are set up to reap the benefits.

Posted by Carla Muss-Jacobs, RETIRED (RETIRED / State License is Inactive) almost 9 years ago

Scary question in a well written post 

Posted by Fernando Herboso - Broker for Maxus Realty Group, 301-246-0001 Serving Maryland, DC and Northern VA (Maxus Realty Group - Broker 301-246-0001) almost 9 years ago

if the only buyer for a 30 year fixed at 5% is the gov than the rest of the market thinks it's a bad investment.

stop and think about that.

i don't think the market dies at 6% or 6.5% as those ar both great rates.

Posted by Jay Beckingham, "I love first time homebuyers" (Fairway Independent Mortgage Company) almost 9 years ago

I hope I'm wrong, but it's starting to look like we are headed on the same path back to the 1970's ! We were faced with run away inflation, devalued $$$, and increasing interest rates for flooding our economy with "unbacked money" !

Posted by Michael J. Perry, Lancaster, PA Relo Specialist (KW Elite ) almost 9 years ago

Maureen,  Low interest rates right now are artificially propping up the market.  Not only is it the time for long term buyers to take advantage of low interest rates, procrastinating sellers need to be on the market while the buying mood lasts.

Linda Metallo, Re/max Impact, Lockport, Il.

Posted by Linda Metallo DiBenardo (Re/max Impact, Lockport, Illinois) almost 9 years ago

Don't worry all, the U S Government and the Mortgage-Backed Security market is smart enough to know when the private buyers will return and the Treasury purchases can be phased out.

The economists and securities managers on Wall Street graduated Wharton and HBS and understand how all this works.

Besides, people buy homes because of the confidence that they will continue have a job and that they can afford the payment, not rates only.

Rates will not move up.  Please see http://fredglickre.blogspot.com/2009/10/future-of-interest-rates.html

 

 

Posted by Fred Glick, Changing the Story in Real Estate & Mortgages (u s spaces, inc./arrivva, inc., u s loans mortgage, inc.) almost 9 years ago

A couple of mistakes in this post but the overall gist is accurate.

First, the amount the Fed is spending is $1.25 TRILLION, not million and not even billion.

Second, the Fed in their policy statement from it's last meeting a couple weeks ago announced that this program would be extended beyond the end of this year and would go through the end of the first quarter 2010. They are not spending any additional money, only changing the pace at which they spend and thus their exit time. This is why rates dropped again a couple weeks ago after the policy statement.

I expect to see rates rise up to a full point in the next six months as the Fed exits the market completely assuming everything else stays the same. The actual correction could be higher or lower depending upon other market changes over the same time frame.

Posted by Bruce Brown, Branch Manager/Senior Loan Officer/CMPS (PrimeLending) almost 9 years ago

Morning Maureen,  Congrats on the feature.  This is a very well thought out and presented post.  Excellent background info.  Well done !

Posted by Bill Gillhespy, Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos (16 Sunview Blvd) almost 9 years ago

Interest rates have nowhere to go but up.  We have a long way to go before all this is behind us.

Posted by Rob Arnold, Metro Orlando Full Service - Investor Friendly & F (Sand Dollar Realty Group, Inc.) almost 9 years ago

Couldn't agree more!

Posted by Paul Carson (Mortgage Network Inc.) almost 9 years ago

Maureen, this is a great presentation of important information, and my team will let our clients know that "times are changing" once again.

Posted by Edy Kizaki (eXp Realty) almost 9 years ago

Good analysis and a well reasoned argument. I'll be sharing your thoughts with my buyers.

Posted by Julia Odom, Chattanooga Homes for Sale (Select Realty Professionals) almost 9 years ago

Maureen - what an eye-opening post!  This is information that should be shared with everyone.  Thanks so much for bringing it to the forefront.

Posted by Lina Robertson, REALTOR® Serving Springfield, Nixa and Ozark, MO (RE/MAX Solutions and RE/MAX House of Brokers) almost 9 years ago

One thing to remember.  The government is borrowing at the treasury rate of 2% to 3%, but making 5% interest on that money.  So they are making 2% or so on their invesment. 

Posted by Steve Lauver, Omaha Realty -- 402-689-7550 (Nebraska Realty -) almost 9 years ago

I believe the printing press will just keep running at higher and higher speeds. The Feds will now never be able to stop buying home loans. They also want student loans ect.

If rates go up how will banks make money?

Posted by Eric Bouler, Listening to your Needs ( Gardner Realtors, Licensed in La.) almost 9 years ago

Great way to get buyers off the fence...

Posted by Tim Ludemann almost 9 years ago

"Don't worry all, the U S Government and the Mortgage-Backed Security market is smart enough to know when the private buyers will return and the Treasury purchases can be phased out.

The economists and securities managers on Wall Street graduated Wharton and HBS and understand how all this works."

Thanks, I feel much better now!

Posted by Diane Schubach (Laffey Fine Homes) almost 9 years ago

Wow, excellent point. The challenge of encouraging buyers to buy now while interest rates are so low is that there is no inventory.  I see you are in LA so you must be experiencing the same thing as we are in OC.  We have a double edged sword. 

Thank you.

Posted by Carolynn Santaniello (Seven Gables Real Estate) almost 9 years ago

Thanks, Maureen for sharing your knowledge.  Let's hope the buyers will listen and we will finish with a great year-end!!

Posted by Carin Baker almost 9 years ago

Very good points.  The only issue now is in order to get any of those loans, you have to be walking on water where your credit score is concerned. 

Only government "help" can get things this screwed up!

Posted by Mick Michaud, Your Texas Lifestyle is Here! (Distinctly Texas Lifestyle Properties, LLC Office:682/498-3107) almost 9 years ago

Good Article about it here ...

Cash buyers might be loving life in about six months.. ;)

 

Posted by Paul Francis, Las Vegas Real Estate Agent - Summerlin Homes (Francis Group Real Estate) almost 9 years ago

Like others have stated, people were buying when the rates were double digits, and we thught 7 or 8 was a good rate, The market will slow I'm sure until everyone adjust their thinking.

Posted by Tony Hager, Broker (United Realty Texas) almost 9 years ago

This is an excellent post, Maureen. It addresses the issues I have been pondering for the last year. We have an artificial market right now. Banks are lending, but want no part of these mortgages. They cannot sell them fast enough. Gone are the days of the bank portfolio of local loans. If the government weren't guaranteeing these loans, the housing market would be in dire straights. Interest rates have to rise. We are too indebted as a nation.

Posted by Millie C. Legenhausen, CRS, GRI, CIPS, MBA, Realtor (Calcagni Real Estate, Hamden, Connecticut) almost 9 years ago

Maureen,

Thanks for the post.

You said...."The fact that banks are unwilling to hold mortgages for their own investment demonstrates that the interest rates of these mortgages are artificially low "

I believe this is not the reason why banks are unwilling to hold mortgages. In my opinion, they are still scared of declining values and do not want to get stuck with more loans that are under water. Banks do not want to lend in a declining market because it exposes them to greater rist. They prefer to lend at a time when values are increasing. That way, when the borrower defaults, the bank can sell the property easily and retrieve their investment.

I do not think it has anything to do with the rate. Just my two cents.

 

Posted by Eric J, Dream Home Financing (Eric J - Dream Home Financing) almost 9 years ago

Maureen: I agree with you. Nice post! A couple thoughts. One, rates have been artificially low for quite a while now; they are due to go back up. Will this kill our market? No. Buyers will continue to return to the market and they're less swayed by what interest rates are. They're in the market period. Thanks again!

Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) almost 9 years ago

So when will politicians reralize this and let the private sector get more involved in Freddie Mac and Fannie Mae?

Posted by John Gallagher, CAS<br /><a href="http://www.thepromoshop.com" t almost 9 years ago

Maureen...I have that same fear of inflation and high interest rates with high unemployment.

 

 

Jerry Gray CRB,CRS,GRI / Prudential Carolinas Realty / Winston Salem, NC

Posted by Anonymous almost 9 years ago

The current administration has no clue on economics. They are lost on history too. Yesterday one of the best in the country provided some insight and I suggest you read it, if you can handle it!

What Were We Thinking?

As a culture, the current mix of generations, especially in the US, has made some choices. Choices which, in hindsight, leave the adult in us asking, "What were we thinking?"

We made a series of bad choices and suffered the credit crisis because of it. Now, as a nation, we are in the middle of making an even worse choice, one that will leave us with no good choices - only choices of pretty bad to awful. Let's begin with a quote from a recent client letter by my friends at Hayman Advisors (in Dallas).

"Western democracies, communistic capitalists, and Japanese deflationists are concurrently engaging in what may be the largest, global financial experiment in history. Everywhere you turn, governments are running enormous fiscal deficits financed by printing money. The greatest risk of these policies is that the quantitative easing will persist until the value of the currency equals the actual cost of printing the currency (which is just slightly above zero).

"There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.

"According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed. [Emphasis mine]

"One has to ask whether the US reached the critical tipping point. Beyond the quantitative measurements associated with government deficits and money creation, there exists a qualitative aspect to such a scenario that may be far more important. The qualitative perceptions of fiscal and monetary policies are impossible to control once confidence is lost. In fact, recent price action in metals, the dollar and commodities suggests that the market is already anticipating the future."

Let me point out that the deficits for 2010 assume a rather robust recovery, and so they could turn out to be much worse, especially if unemployment continues to rise and Congress decides (rightly) to extend unemployment benefits.

The interest on the national debt in fiscal 2008 was $451 billion. Even though the debt has exploded, the interest for fiscal 2009 is down to "only" $383 billion. My back-of-the-napkin estimate says that is over 20% of total 2009 tax receipts. I guess when you take interest rates to zero and really load up on short-term debt, it helps lower interest costs. (More on that future problem later.) http://www.savingsbonds.gov/govt/reports/ir/ir_expense.htm

The fiscal deficits are projected to be about 11% of nominal GDP, which is now roughly $14.3 trillion. The Congressional Budget Office currently projects that deficits will still be $1 trillion in ten years.

Last spring I published as an Outside the Box a very important paper by Dr. Woody Brock on why you cannot grow government debt well above nominal GDP without causing severe disruptions to the overall economic system. If you have not read it, or would like to read it again, click here.

I am going to reproduce just one table from that piece. Note that this was Woody's worst-case assumption, adding 8% of GDP to the debt each year, and not the 11% we are experiencing today. The Congressional Budget Office projections are now even worse, and that assumes a very rosy 3% or more growth in the economy for the next five years. Under Woody's scenario, the national debt would rise to $18 trillion by 2015, or well over 100% of GDP, depending on your growth assumptions. Take some time to study the tables, but I am going to focus on 2015 and not the outlier years.

jm100909image001

$1.5 trillion dollars means that someone has to invest that much in Treasury bonds. Let's look at where the $1.5 trillion might come from. Let's assume that all of our trade deficit comes back to the US and is invested in US government bonds. Today we found out that the latest monthly trade deficit was just over $30 billion, or $370 billion annualized (which is half what it was a few years ago). That still leaves $1.13 trillion that needs to be found to be invested in US government debt (forget about business and consumer loans and mortgages).

Killing the Goose

$1.13 trillion is roughly 8% of total US GDP. That is a staggering amount. And again, that assumes that foreigners continue to put 100% of their fresh reserves into dollar-denominated assets. That is not a safe assumption, given the recent news stories about how governments are thinking about whether to create an alternative to the dollar as a reserve currency. (And if I was watching the US run $1.5 trillion deficits with no realistic plans to cut back, I would be having private talks too. They would be idiots not to do so.)

There are only three sources for the needed funds: either an increase in taxes or people increasing savings and putting them into government bonds or the Fed monetizing the debt, or some combination of all three.

Now the Fed is in fact monetizing a portion of the debt as part of its quantitative easing program, and US consumers are saving more. Tax receipts are way down. I can tell you there is a great deal of angst in New Orleans tonight about the Fed monetization. This is traditionally a "gold bug" conference, and many of the participants and speakers see only inflation in our future.

Long-time readers know that I think the Fed has been able to get away with its rather large monetization program because of the massive deflationary forces let loose in the world by the credit crisis, which is forcing a monster deleveraging regime all over the world. Where has all the money gone that the Fed has printed? Right back onto the Fed's balance sheet as bank reserves. The banks are not lending, so this money does not get into the system in the usual manner associated with fractional reserve banking. Until that happens, and is accompanied by increasing wages and employment, inflation is not in our immediate future.

And this brings us to our conundrum. You cannot continue to run deficits significantly larger than nominal GDP for too long without risking the demise of the economic system. Ask Argentina or any of the other nations where hyperinflation occurred, as detailed in the study mentioned above. But we are in a deflationary environment, so the Fed can monetize the debt far more than any of us suppose without risking immediate and spiraling inflation.

But there is a limit to the Fed's ability to do so without causing real inflation. First, as long as the Fed is independent, at some point they will simply have to tell Congress we can no longer monetize the debt. While I am sure that some of you doubt they would do so, the Fed officials and economists I have been around are pretty adamant about that. There is a line they will not be pushed past. It may be further than I like, but it is there.

The Fed cannot simply buy up all the debt needed to fund the government. Again, no one on the FOMC would either advocate or allow that. That would in fact start us down a very dangerous path rather quickly. Therefore, they must have a large number of willing bond buyers outside the Fed. The good news, gentle reader, is that we will find someone to buy that debt. That is also the bad news. Let's go back 30 years.

Legend now has it that Paul Volker single-handedly took the inflation bull by the horns and ripped them off. Now, it took fortitude to do that in the face of certain recession and high unemployment. Those were not fun days. But his partner in the deed was the bond market. Bond investors simply demanded higher returns, because they were really worried about inflation.

At some point, if we do not get the government deficit under control, the bond market is once again going to react. Seemingly overnight, real (inflation-adjusted) rates are going to rise, and will do so rapidly. And I am not talking about 1 or 2%. You just cannot have 8% of a $14-trillion GDP go into US government debt every year, forever, at today's low real rates.

Let's play a thought game. If you take 8% of US consumer spending and save it, and it finds its way into government bonds, you have reduced consumer spending and therefore the actual GDP. But how about those who want to invest in stocks? Foreign bonds and currencies? New businesses? Loans of all types? How much are we going to have to save to get the necessary capital? How high will the saving rate have to be to finance all those other activities in a world where debt securitization is still anemic?

Some will point to Japan and their government debt-to-GDP ratio, which will soon be over 200%, a far cry from where we are today. Why can't we grow our debt to 200%? Because the Japanese have long had a culture of saving and investing in government bonds. It's what you do to support the country. But even they will run into a wall as their savings rate continues to drop, because so many of their citizens are retired and are now selling bonds to finance retirement. They too are running massive fiscal deficits, on the order of the size of the US deficits. And does anyone really want to have two lost decades, like Japan?

How long can we go before there is an upheaval? I don't know. The markets can remain irrational or complacent for a lot longer than most of us think. It could be years. Or not. Suddenly, it will be July 2008 and the bond vigilantes stampede.

But now, we seemingly can borrow with no consequences. The deflation that is in the air, plus the lack of bank lending holds, down the normal inflation impulses. We as a nation are leveraging ourselves up. We're partying like it's still 2005. The music is playing and we are dancing. Our Congress is trying to figure out how to run even higher deficits.

At some point, the consequences will be significant. There are two paths, and it is not clear which one we will take. First, we might see inflation kick in and actual rates rise. Since so much of our national debt is short-term debt, that means yet another rise in the deficit as rates rise. Mortgage rates rise, putting pressure on the housing market. There will be even more pressure on commercial mortgages. Consumer debt will be harder to get and cost more. It will mean funding costs for businesses will rise, and that hurts employment. It would be a return to the 1970s of high interest rates and stagnant growth in a very slow-growth environment.

Second, we could see deflation kick in and, even though rates stay more or less where they are, real (after-deflation) rates could rise as they did in the '30s and in Japan.

Some of my most knowledgeable friends argue for the inflation side, and others take the deflation side. I tend to think the Fed will fight deflation until we get inflation, but the consequences will not be pleasant. There is no benign path.

How can we avoid such an upheaval? The only way is to make some very difficult choices. There have to be some adults making the choices, as the teenagers now in control clearly cannot make them.

As I have written in the past, we can run deficits of 2% of GDP for a very long time, which in a few years would be about $300 billion. It is my belief that if the bond market and world investors saw a credible plan to put us on a path to a deficit no larger than 2% of GDP, the dire upheaval that is in our future could be avoided.

But that will mean some painful choices. It is not a matter of pain or no pain, it is just deciding when and how bad it will be. The longer we wait, the worse the consequences.

Let's Play Turn It Around

There are businessmen who are called turnaround specialists. They come into companies that are sick but have a basic competency, and that with the right management can be made into viable concerns. Generally, the choices the new management makes are painful to those involved, but they are necessary if the enterprise is to remain a going concern.

So, for the next few pages, I am going to suggest some things we can do to turn the US around. They are not easy fixes, and I know a lot of readers will not like what they read or will disagree on points. But something like this is going to have to be done, or we risk killing the goose.

First, we must acknowledge the deficit is out of control, and spending must be cut. If we raise taxes by as much as the Obama administration now wants to, we will most assuredly put the country back into a deep recession in 2011. Think what raising taxes in 1937 did to a nascent recovery. A $3-trillion-dollar budget is 20% of the US economy. That is just simply too much.

Quick fact. The most credible studies show that government expenditures exert no multiplier effect on the economy. Actually, they show them to be very slightly negative. This is not just in the US. However, the tax effect has a multiplier of 3! If we raise taxes by $300 billion in 2011, that will slam the economy in the face. Further, we will collect less taxes than projected, as economic activity will fall.

You cannot cure a too much debt problem with more debt. We cannot borrow our way into prosperity. Every crisis of the past decades has been a result of too much debt and leverage and we seem to want to repeat the past mistakes, hoping that this time it will be different. It won't.

Ok, now let's play the Turnaround Hammer Game.

+ We should start with a 5% acrossthe-board cut in spending in all programs. Federal employees, except for military personnel, should see a 5% cut in pay as part of that program. The average federal worker makes $75,419 a year, while the average in the private sector is $39,751. The rest of us are taking pay cuts in the form of higher taxes. No cost of living increases, etc. We are on an austerity program and need to do what it takes. If a program is deemed too important to be cut, then another program has to be cut more.

Then the next year another 2.5% cut across the board. And then an absolute freeze on the overall budget size until the deficit is 2% or less of GDP.

+ Social Security must be fixed now. We all know that it is going to have to be done, so why not just do it? Means testing should be a part of the mix. As an idea, for every $10,000 in income a retiree has, he gets $1,000 less in SS payments. And increase the retirement age down the road. When SS was launched, retirement age was 65. But the average life span was 65. There are other things we can do, but whatever our poison of choice is, we need to take it.

+ Medicare must be revised, with real health-care reform. The national debt is $56 trillion if we count unfunded liabilities, much of which is Medicare. It will become a nightmare around the middle of the next decade. Adding more expenses now without cutting elsewhere makes no sense. If we kill the goose, no one will get anything excect very empty promises.

Side note: there actually is a lot of waste in the system. Software should be written that analyzes every patient and procedure and produces an outcomes-based analysis of what is reasonable, rather than throwing every test at every patient. And the government should make sure, even if it has to spend the money, that the updated system is in place in every hospital and clinic in the country. And doctors should be given access to it so they can decide what type of care is appropriate to prescribe. And health-care reform means tort reform.

Today, I got a note from a friend of mine who just had yet another heart attack. It seems his stent is now blocked by 50%. He is a vet, and his primary care is the Veterans Administration. The Veterans Hospital system will not do a procedure to unblock the stent until it is 70% blocked. He does not have any money, so he is simply waiting to have another heart attack. I am really looking forward to government-run health care.

+ Each year we allow almost 1 million immigrants into the US, mostly family of people already here. I suggest that for the next two years we stop that. Instead, let anyone who can buy a home, passes basic screening, and can demonstrate the ability to pay for health insurance immigrate to the US and get a temporary green card. If they behave, then the card becomes permanent after four years.

We almost immediately put a floor on the housing market, absorb the excess homes, and within a year the housing-construction market, along with the jobs that are now gone, will be back. That is stimulus that costs the taxpayers nothing.

+ While I can't believe I am writing this, taxes are going to have to rise, if for no other reason than this Congress is hell bent on raising taxes. But rescinding the entire Bush tax cuts, plus adding a 10% surcharge as Congress wants to do in one fell swoop, is an absolute guarantee of a recession. So do it gradually over (say) 4 years, and then reinstitute the cuts when the deficit is under 2% of GDP. Remember the negative tax-multiplier effect of raising taxes. And the definitive work on that was done by Obama's chairman of the Council of Economic Advisors, Christina Romer.

We should consider a VAT tax and a major cut/reorganization of the corporate tax. We need to encourage corporations to hire more, and you do that by taxing less. Let's make our corporations more competitive, not less. Our taxes are much higher than those of any of our major competitors. And please forget that insane carbon tax. If you want to cut emissions, do it straightforwardly by raising taxes significantly on gasoline. Don't back-door it on consumers. (And I am NOT advocating such a policy.)

+ An aggressive tax benefit for new venture-capital money that is invested in new technologies will result in new industries. The only way we can grow our way out of this mess is to create whole new industries, like we did in the late '70s and '80s. (Think computers and the internet and telecom.)

+ Unemployment is likely to continue to rise and last longer than ever before. We have to take care of the basic needs of those who want work but can't find it. Unemployment insurance should be extended to those who are still looking for work past the time for benefits to expire, and some program of local volunteer service should be instituted as the price for getting continued benefits after the primary benefits time period runs out. Not only will this help the community, but it will get the person out into the world where he is more likely to meet someone who can give him a job. But the costs of this program should be revenue-neutral. Something else has to be cut.

+ We have to re-hink our military costs (I can't believe I am writing this!). We now spend almost 50% of the world's total military budget. Maybe we need to understand that we can't fight two wars and support hundreds of bases around the world. If we kill the goose, our ability to fight even one medium-sized war will be diminished. The harsh reality is that everything has to be re-evaluated. As an example, do we really need to be in Korea? If so, why can't Korea pay for much of the cost? They are now a rich nation. There are budgetary fiscal limits to being the policeman for the world.

+ Glass-Steagall, or some form of it, should be brought back. Banks, which are subject to taxpayer bailouts, should not be in the investment banking and derivatives-creating business. Derivatives, especially credit default swaps, should be on an exchange, and too big to fail must go. Banks have enough risk just making loans. Leverage should be dialed down, and hedge funds selling what amounts to naked call options in any form, derivative or otherwise, should be regulated.

Let me see, is there any group I have not offended yet? But something like I am suggesting is going to have to be done at some point. There is no way we can continue forever on the current path. At some point, we will hit the wall. The fight between the bug and the windshield always ends in favor of the windshield. The bond market is going to have to see a credible effort to get back to a reasonable deficit, or we risk a very difficult economic environment. The longer we wait, the worse it will be.

It is not going to be easy to persuade a majority of Americans that we need to do something now. More realistically, we are going to probably have to begin to experience a crisis of some type to get politicians motivated to do something.

This last Tuesday, I spoke to the Financial Leadership Association at the University of Texas at Dallas. It was mostly undergraduates, and my assigned topic was how financial research impacts our investment decisions. In touched on the topic above, in less detail, but pointing out that at some point we are going to have to bring the deficit under reasonable control. I got some push-back, as some could not understand why we just couldn't keep running deficits, as we simply owe it to ourselves. I tried to explain, but for a few of them I was not getting through (though I think most got it). And these were the finance students! I shudder to think what the sociology department would be like.

We are not going back to normal, although it is likely we will see some form of Statistical Recovery. But we cannot get complacent. Somewhere out there is the real potential for another crisis, which will dwarf the last one. You will not want to be long much of anything when it happens, except hedged or liquid investments. Though admittedly, this could go on for a long time. I just don't know how long "long" is. Other than it will be too long and then not long enough.

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Posted by John Rakoci, North Myrtle Beach Coastal Carolinas (Eagle Realty) almost 9 years ago

This is just more of the same that got us into this mess with the politically well connected still getting hundreds of billions of taxpayer dollars. Even as prices are dropping we still artifically high prices.

These handouts will stop soon and the big collapse will come. Expect the stock market to go below 3000 and house prices to be at 1996 levels within the next two years. Then, like the last Great Depression, expect recovery to take about 25 years.

Instead of worring about it plan for it. There will be huge opportunites out there for those prepared for this...

Posted by Robin Turner, Robin Turner (Happy House Real Estate) almost 9 years ago

Great post Maureen,

I think you mean 1.25 Trillion not Million, but you raise some excellent points. Thank you for bringing this problem to light ahead of time.

Posted by Ted Duncan almost 9 years ago

Good food for thought Maureen.

Posted by Linda Landry (HomeSmart Realty) almost 9 years ago

It will be interesting to see  how it all  plays out. Mortgages are an essential part of the economy as well as real estate. Either we are in for a blood bath or the consumer will get back into it as well as the investment community.

Posted by Mark Warner (RealEspace) almost 9 years ago

If it were not for the FEDERAL GOVERNMENT loans for housing, I would not have been able to sell but one home this year. One cash buyer and all the rest had to come up with 3.5% down and request the seller to help with closing costs.

Thank GOD for government! Business failed us by getting lobbists to push de-regulation down our throats. If those that don't agree about the government program - I will be glad to accept the commission earned from all those sales that required that type of finance.

Oh, yeah! You want to know where my buyer got his cash? He sold his other home during the heat of the market. I would take my financial advise from him before I listen to those on the NEWS where they are still trying to place the blame on anyone other than those that were in charge.

Posted by Gregory Bain, For Homes on the Jersey Shore (Mezzina Real Estate & Insurance) almost 9 years ago

Maureen - i loved your post but had so far to scroll with one individual's comments (and links and charts in your comments I might add) that it almost looked like your very well put, succinct post got highjacked. Perhaps your other commenter ought to take his comment and make it just that - a post...

Posted by Christianne O'Malley, Exceptional Service - Delivering Results in Reno! (RE/MAX Realty Affiliates) almost 9 years ago

I have been thinking a lot about the feds control of the housing industry and the impact in the last few weeks. 

I don't have stats but I actually thought it was higher than 85%.  Sure seems like it close to 100%.

 

Posted by Mark Watterson, Utah Real Estate almost 9 years ago

John Rakoci - that wasn't cool to include a whole blog article in a comment section with backlinks.  Looks like you are trying to hijack the article.  I'm guessing you didn't know that was not the right thing to do.  Or, you really don't care about other people.....only you would know.

Great article.....but I think you got your millions and trillions mixed up.....minor details, but makesa large difference.  Don't we wish it was only 1.25 million? 

I think rates will go up because I don't think there is a big appetite for MBC on wall street.  And higher rates will drive down hom eprices due to the affordabilty factor and all lenders and fannie mae lowering the DTI threshold.  Darn't, I won't be able to get future buyers who can't really afford the payment with their 60% DTI.  Max will be 45% and maybe 50% with strong compensating factors.

Hold on, we are in for another downturn in real estate in 2010...stay lean and mean to weather the second storm.

I dont know why one reporter can't ask the current admiistration to address all of this.

Posted by Brad Yzermans, Temecula-Murrieta-Menifee FHA/VA Mortgage Lender (First Time Home Buyer & Down Payment Assistance Specialist in So Cal.) almost 9 years ago

When Uncle Sam stops buying mortgages, rates will go up. Rates will have to rise in order to attract investors to buy the mortgages. It is current Federal Reserve policy to hold rates down to aid in the economic recovery.  The Fed has done this by massive purchases of mortgage bonds. The Fed has already announced that there is a limit to the amount of mortgages that they will buy. They have slowed down the rate of purchases of mortgage bonds, but they have not increased the amount that will ultimately be purchased. Expect rates to rise next year.

John Juarez, REALTOR

Windermere Properties of the East Bay

John@CarlMedford.com

510-673-0686

Posted by John Juarez, ePRO, SRES, GRI, PMN (The Medford Real Estate Team) almost 9 years ago
Don't know if I can really add anything to this great post but to say I am more concerned about our lending situation than the next wave of foreclosures (which I believe will be bled slowly). Cash investors-get ready for the time of your lives!
Posted by pam adkisson almost 9 years ago

Thank you for the wake up call.  Interesting times ahead of us. Great post!!

Posted by Inez Meehan (Keller Williams ) almost 9 years ago

Makes one think.

Posted by Pat Ogle, Associate Broker,CRS,GRI,ePRO - SEMPER FI! (Champion Realty, Inc) almost 9 years ago

Tough call about timing but you make solid arguments about why it would happen. Thanks for not just spouting off statistics. You gave meaning to the numbers.

Posted by Joe Pryor, REALTOR® - Oklahoma Investment Properties (The Virtual Real Estate Team) almost 9 years ago

I am one of the few that feels that the FED is performing well.  I have some good company in this - I saw Jim Crammer a few days ago who also feels the FED is doing what needs to be done.   Bernanke was an academic and though many deride academics he WAS  a student of the Great Depression.  As such he knows what we SHOULDN'T do - and a lot of people are suggesting we do exactly what pushed us into the Great Depression based on ideology.  Supporting the economy with capital is exactly what you do in a  dangerous deflationary situation.  They didn't do this after the stock market crash of 29 - and look what happened.  You want a repeat because your ideology says this is what you should do?

Interest rates will rise - eventually.  They need to.  But in this fragile state the federal government will not stop buying loans.  THey may want to, but they know they can't.

I am telling buyers to stop procrastinating. Sellers as well.  Interest rates will rise - we just don't know when or how fast. Too many are trying to "time" the market.  You can only time things just so much.  For example - those who saw the bubble in 2003-2004 were correct (intellectually) to sell their home.  But they were too soon.  Many were bailing out and hoping to snatch up a bargain.  They got stuck in rentals while they watched the market continue to rise through 2007 in our area.  Those that bailed in 2007 were lucky - they got the timing right -but there is no magic formula to ensure that said timing is exactly right.  Buyers and sellers will only know that when it is too late to act.

 

Posted by Ruthmarie Hicks (Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605) almost 9 years ago

Maureen,

If and when rates rise and by how much will sift out the real players from the fakers- from those who can go and those who wish they could.

Your post is right on.

Posted by Eugene Adan, Carlsbad Real Estate (Adan Properties, Carlsbad, CA (760) 720-9710) almost 9 years ago

Maureen - I'm not trying to be rude when I say this but you should really continue writing about information you are more educated about.  This is an extremely complicated topic and your blog has quite a few inaccuracies.  I know the intention was good, to get buyers purchasing homes, but your facts and assumptions based on those facts aren't completely accurate.  There are many other factors that go into the originating, servicing, purchasing, trading and securitization of mortgages.  Overall, I agree with your assessment that rates will go up over the long-term.  If you are going to include percentages, government loan programs it may be a good idea to hyperlink the articles in which your facts are coming from.  Just a suggestion.     

Posted by David Krushinsky (Skyline Home Loans - NMLS 202115) almost 9 years ago

We most definitely are in a mess.  Most of it brought on by greed and deregulation. 

How many times did you see an investor lie about owner occupying a home?    How many times did you see a buyer over bid because they thought they could flip it in a few days and make a killing? How many times did you see a lender provide a loan that they knew the buyer was not qualified for?  And when the market came to a screaming halt and they couldn't make their return, they walked away leaving the rest of us holding the bag. 

During the late 90's when tech stock was king, how many times did you know someone who pulled out their retirement from the stock market because they were no longer averaging 21% but 8%? How many of them turned to real estate because they could make huge returns? 

How do you devide up a mortgage that was sold to 27 different investors that was worth $300,000 in 2006 and is now worth $100,000.00 in 2009?  The investors don't want to negotiate with the homeowner that wants to keep their home?  The home buyer that has lost because all the investors had driven up the market when they purchased and needed a home.  The same investors that have blighted our neighborhoods with vacant, vandalized homes and appalling dead landscaping. Well, now you all own a little piece of nothing and I don't feel one bid sorry for you. 

Shame on the American greed!  For it is this greed that has created much of this situation!  It makes me sick to see what this greed has done to our country and the state of economy.

As for government bailout, which each and everyone of will pay for,  seems to be a necessary evil to keep our country from collapsing.  When government deregulated banking the rooster stopped watching the hen house.  No wonder we are in this mess!

 

 

Posted by Nicki Pousson, HomeSmart Elite Group (HomeSmart Elite Group, Associate Broker, CDPE, ABR, SFR) almost 9 years ago

The government will soon be out of money. With the dollar is dropping, China may well cut up our credit cards soon enough.

We're already seeing a major decline in "qualified" buyers as minimum credit scores and down payments are going up. Just like the S&L scandal of the 80s, the need for creative financing and selling techniques is very real.

I work with "bad credit" buyers through owner financing (contract for deed) or lease options, and that buyer pool is near limitless! Bear in mind that bad credit buyers are now people with less than 640 credit scores, but past bankruptcies, divorces, or a few late payments knock previously qualified buyers out of "qualified" status very easily. These people still need housing, so it just takes some creativity to ge the deals done.

If you can work with your buyers and sellers on creative financing techniques, you'll have no end of buyers lining up to buy - I don't have enough homes as it is!

Posted by Pat Friedl (Real Estate Heavyweight) almost 9 years ago

It's not jut the interest rate that drives mbs (mortgage backed securities).  Investors look at yield, the interest "coupon" that the security offers, as well as the effective interest rate given that the bond has been purchased either at par, at a discount (increase yield) or a premium (decreases yield).  Investors also look at duration - how long will the bond be outstanding.  This requires that the investment be valued using actuarial methods that looks at geographical, demographical and "risk profile" to come up with an expected duration.  Given the amount of pre-payments, short sales and foreclosures, investors are unwilling to pay top dollar for an mbs if the duration is not going to be satisfactory.  And forget credit default swaps on MBS.  This type of protection is non-existent. 

What we are going to see is the portfolio lender coming back into fashion just like the savings and loans were 30 years ago.  They are your neighborhood lenders and do not package the loans.

Do you see the cycle?  We've already been through it once.  Looks like we've come around 360 degrees.

Posted by Martin Kalisker, Professional Standards & Legal Assistant (Greater Boston Association of REALTORS) almost 9 years ago

Well written post and good analysis Maureen.  But, even if interest rates increase by 50% we would still be sitting at about 7.5-8%.  Historically those are fairly decent rates.  Sure homebuyers may not be able to afford as much of a house at those rates, but maybe that's what need, and are starting to see more of, people living within their means.  I don't think we have to fear inflation yet at this point.  If people don't have jobs they aren't going to be purchasing much of anything.  Inflation does not just rise on it's own, it needs demand to push prices higher.  Right now demand for products/services is still very tepid and probably will be for the next year or so.  Best of luck to you.

Posted by Jerry Murphy, CRS, SRES, Anthem, Phoenix, and Scottsdale AZ Real Estate (Long Realty West Valley) almost 9 years ago

 

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Maureen the short answer to your questions is straight up maybe like a rocket blasting off the pad.  It could be a data release that disappoints the Bond and Treasury markets, a national or world event like the FED starting to sell MBSs or one in a thousand thinks that will cause the holders of these securities to sell in masses. 

 

I have seen this time and time again over my 20 years as an Originator and several times over the last 2 while working directly in the Mortgage Backed Securities industry. 

 

Do you remember May 21the of this year, we had an increase of over 5 discounts point in cost in less than 10 days.  So my point is understand a 4.750% interest rate at zero points to the borrower on May 20 would cost that borrower 5 points of their loan amount during the first week of June.  For a zero point rate in early June rates were near 6.00%.

 

Today’s buyer has a true real estate investment opportunity, reduced sales prices, $8K of government incentives and a low interest rate environment.  If they don’t take your advice I would say “They snoozed and lost”.

 

Thom Champion

Posted by Tom Champion almost 9 years ago

Good post, always good to have a glimpse at how other's in the business see things.

In my opinion, the Govt. could do more to help out by taking all bail out and TARP funds and buy up all the toxic loans from Banks/Lenders. That would free up cash, stack the Govt. portfolio, end the slow agony of waiting for all the default/foreclosure madness to be done, and get us to a bottom a good bit quicker than the track we're on.

In the end, I think the Govt. would actually realize a profit, even if by accident!

Posted by Pete Buckley (Independent Broker/Realtor, North San Diego County CA.) almost 9 years ago

Very eye opening!! It's great input to get those hesitant buyers motivated! Thank you for great information!

Posted by Trisha Cobb, Results that move you! (RE/MAX Prime) almost 9 years ago

Great post Maureen! Thank you for sharing this! I think we are in for some more fun in our industry over the next year!

Posted by Stephanie Reynolds, East County San Diego Homes 619-838-4408 (Integrity First Financial Group, Inc. ) almost 9 years ago

Thank you for pointing out my typo about $1.25 million and that it should, of course, be trillion. I have corrected it. We could only wish that it were only millions

Posted by Maureen Megowan, Palos Verdes Real Estate Blog (Remax Estate Properties - ) almost 9 years ago

Maureen:

Great post.  Just who can keep the millions, billions and trillions straight, certainly not government.  When it gets to a government deficit in the gazillions perhaps we will start paying attention.  The way our government representatives are throwing our money around it's difficult to keep the millions and trillions straight, but who's counting?  I don't think many are when they believe "government" should straighten this out. 

Government is the reason we are in this disaster.  By strong arming the banks into lending to people who could not repay the loans under the threat if they didn't they would not be in business much longer and now exacerbating the situation with the new Streamline FHA loan refinance with up to 125% LTV, no appraisal, no kidding this is worse than sub prime because it is a direct tax payer bailout.  I do NOT do FHA.

Who can blame the banks for not wanting to keep these loans on the books when the vast majority of them are probably FHA with only 3% down - no reserves, FHA Streamlines up to 125% LTV - no reserves - no appraisals on top of Fannie Mae REO's (with little more than 3% down, no appraisal required).  The are looking at a huge segment of a portfolio that is going to go to foreclosure.

I will do VA - no mater what, these veterans earned their right to a home and we need to support them.

In fact currently 14.58% of the FHA loans are delinquent while 2.58% are in foreclosure.  The banks are dodging the bullett by off-loading these loans immediately.  But in the final analysis it's another Taxpayer funded bailout on the way.

Considering government started this mess, isn't it time for a common sense approach to be taken and get the government out of the housing industry.  Government is doing their best to manipulate the market and interest rates, it all leads to hyper-inflation down the road. While we need laws, we don't need a government running the show.  Look at every program they have implemented - their bankrupt or near bankruptcy.  Even the cash for clunker program was a disaster, many of the car dealerships still haven't been paid.

For a potential buyer, rates will probably not go any lower since the Feds are purchasing the 4.500% coupon bonds so the rates will stay in the 4's and 5's for most conforming loans but when they stop buying the bonds rates will tick up dramatically.  It would be wise to get off the fence now, the cost of money will not get any cheaper.

Posted by Patti Geib (Capital Line Funding Group) almost 9 years ago

If the rates go up, then I believe we'll have a problem with further drop in Real Estate values.

Posted by IL Agent almost 9 years ago

The government has been originating & buying mortgages since 1938.  Public pressure in the 1960's moved the government to "privatize"  Fannie; Freddie was created in 1970 thereby creating GSE's.

I don't see the government, after 71 years of this activity,  suddenly shutting off the spigot.  What comes more as a serious concern is the dominance of just three banks.  The Federal Reserve Act as I understand was created in part to prevent this kind of oligarchy.  Remember, it was the concentration of cash and assets in the "money center banks" (NY) along with speculation that lead to the Great Depression.  I'm afraid the Fed has done more these days to foster this consolidation than prevent it.

Posted by David L. Montgomery, David L. Montgomery (MULAMONT REALTY, LLC) almost 9 years ago

Too big to fail? let all the little banks fail instead. Just another rung up the eminent ladder of Socialism.

Posted by John DL Arendsen, Crest Backyard Homes "ADU" dealer & Contractor (CREST BACKYARD HOMES, ON THE LEVEL GENERAL & FACTORY BUILT HOME CONTRACTOR, TAG REAL ESTATE SALES & INVESTMENTS) almost 9 years ago

Great post with data all buyers and sellers need to know.  We will see what next year will bring but for now deal with this market and do the best you can for your clients.

Posted by Scott Guay, Associate Broker. Ocean City and Ocean Pines MD (Berkshire Hathaway Home Services PenFed Realty) almost 9 years ago

Well with personal past experience with 2 of the Big 3... we are all doomed!

Posted by Erica Ramus, MRE, Schuylkill County PA Real Estate (Erica Ramus - Ramus Realty Group - Pottsville, PA ) almost 9 years ago

Maureen,  All too many people are thinking we are on the rebound...not even close!  We are in for a major challenge not too far ahead.  I will use some of your material with my buyers to encourage them to make a move now rather than later.

This was worthy of being featured, great job!

Posted by Sara Homan, Realtor, Homes, Farms & 55+ (Coldwell Banker Ellison Realty 352-209-4044) almost 9 years ago

I suspect you are right.  There are too many variables to predict where we are going.  I suspect inflation will dirve interest rates up and keep prices level, but I do not think we will have a big decrease in prices again.

Posted by Gene Riemenschneider, Turning Houses into Homes (Home Point Real Estate) almost 9 years ago

That is why I joined the Steve Harney group so I can be prepared for when that time does come and it will. At a certain piint they will quit buying them and rates will go up, that is why it is best to keep informed so we can iform our sellers and buyers. If we keep a step ahead we will prepared for what will follow. He keeps us current on all the local and federal changes and possibilities.

Posted by Barbara Tretola (RAC Real Estate Associates, Inc.) almost 9 years ago

The question posed by this post was what happens when the government stops buying up mortgages?  I think the real question is what happens when the government stops aritficially propping up the real estate market (i.e. through buying up mortgages, expanded FHA role, tax credits, bank bailouts, etc.)?  The answer is that home prices will finally drop down to where they should be, which is based on peoples' incomes, not the availiability of debt.  We have definitely not hit the bottom.  More foreclosures are coming.  Lower prices are coming.  Higher interest rates are coming.  Personally, I would much rather pay a low price with a high rate versus an inflated price with an aritifically low rate.  Why?  Exit strategy.  Prices and interest rates are inversely related.  Prices and availability of debt are directly related.  Therefore, a market with cheap and readily available mortagages is by definitiion over priced.  That is why now is decidely not the time to buy unless you are buying a foreclosure or short sale at a steep discount.  It is always best to buy when prices are cheap (i.e. when rates are high and mortgages are harder to obtain) and then sell when rates are low and mortgages are easier to obtain.  If you buy when rates are cheap and loans easy to obtain what happens when you need to sell in a market where rates are high and loans harder to obtain - a short sale.

What we need to remember is the "investment" aspect of owning a home was never that the home would increase in value at 20% to 30% per year and you be able to resell it and make a mint in a few years.  That whole thing was an aberration.  The real "investment" aspect of owing a home was the annual protection from inflation and the buildup of equity so that after 15 years or so you would actually own your own home and not be paying rent.  Somehow, we have lost our way the era of the perpetual mortgage payment settled in.  My view is that you always have a mortgage payment then you do not really own the home.  Instead of paying rent to Mr. and Mrs. Smith, you are paying "rent" to the bank (or now Uncle Sam).

Posted by Jim McCormack, Nashville Short Sale REALTOR - Stop Foreclosure (Nashville Short Sale Specialist - Jim McCormack - Edge Advantage Realty, LLC - 615-784-EDGE (3343)) almost 9 years ago

this is all to complex and none of us really knows the answers.  However, I agree that it is apparent that interest rates will go up, which will cause prices to drop even more.  This is going to last a long time.

Posted by Jirius Isaac, Real Estate & loans in Kenmore, WA (Isaac Real Estate &TriStar Mortgage) almost 9 years ago

Interest rates are bound to go up.  Just like taxes.  The government continues to create more debt with little concern for the consequences. 

Posted by Charles Perkins (Charles G. Perkins, CPA) almost 9 years ago

The government will never stop buying mortgages. 

Posted by J. Philip Faranda, Broker-Owner (J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY) almost 9 years ago

Way to say it Maureen.  Soon we will hear about a Mortgage Czar (if there isn't already one) being appointed to make sure you cannot actually do an early payoff a debt that is owned by the government, even though the papers you signed said otherwise.  If you actually had the money to get out from underneath the governments control it would be deemed to be a diversity issue because the demographic wouldn't meet the new standards.  After all, we cannot have a bunch of evil rich people doing something that would be unjust to the rest of the lazy masses.  Can you tell where I'm coming from on this?

Posted by David Wallner almost 9 years ago

Marueen -

You raise a very serious question that "the media" is talking about... Our fragile housing market certainly doesn't need additional complications. 

This is a well deserved feature, with some OUTSTANDING COMMENTS.

Posted by Debbie Summers (Charles Rutenberg Realty ) almost 9 years ago

The ONLY game in town is not through debt. It serves too many in this debting game to base the economy on consumer spending. Why does it not seem to matter how much people are saving and not spending? If the nation is strong and secure and the economy is balanced with the average person/household saving a regular amount - wouldn't this make it better for everyone? Isn't it pure insanity for the feds to TAKE money from everyone to GIVE to anyone wanting and able to buy a new car? We just collectively financed the purchase of 700,000 new cars. They couldn't put it in there that that portion of the $4500.00 would be paid back - even interest free? These are no less than irresponsible children running things like this.

And sadly, if the government came out tommorrow with a program to pay for 25% of the cost of a new home, no doubt the majority of you would be scratching and clawing to get your share of it. So, with nice, expensive suits and clothes - you're the consumer's best friend. Right? Just who was "selling" these bad home loans/ home sales that led to the mess we're in? How many of you knew or should have known it was going to cause a lot of grief for a lot of people and weighed that against the kind of easy fast money to be made? The average consumer is smarter over-all and learns fast too. Are you feeding the minds in Washington - encouraging them to belive that throwing billions and billions in cash to plug the holes in this sinking ship is the best idea? Any of you speaking to Washington on what went so wrong and asking who's responsible for it?

Any of you asking how the hell the treasurer could be given the power to write the TARP act which states that his decisions are non-reviewable by any court or administrative body? Any of you even care to know where that money went? The suits and ties that pulled all that off looked and dressed......just.......like..........you! I'm not happy with it. I'm not going to be satisfied until we know where the TARP money has gone. I won't be happy until the supreme court does it's job and orders an investigation into these unconstitutional activities. I wish things were differant - but a business I have worked for 30 years is struggling because of the kind of crap described and asked about above. And I'm only one. One voice and one story. The days of trusting people just because of the way they dress, what they drive and where they lease office space - are over. "Change is on the Way!"...yeah right! 

Posted by William Lasko almost 9 years ago

Maureen,

Top notch post, worthy of being featured. if only for the drawing out of great comments. The role of the federal government in our Capital markets has changed, and we all, as financial professionals, have to carefully discern the new paradigm. what will be the rules of the new system, and how to protect ourselves and the Clients and Customers we advise?

 


 

Posted by Joe Pascal (Joe Pascal - 5 Star Real Estate - Serving Wilmington, N.C.) almost 9 years ago

Maureen - Great Post. You raise some interesting questions and I have to agree with you. Private investors will not be coming back to the mortgage market until the interest rates climb but I am not so sure it will happen as soon as you say. I think we will have to work through the REOs and SS before we see interest rates go up and that could be until mid 2010 (or longer in some areas). Congrats on the feature!

Posted by Kathie Burby, REALTOR, SFR, Tuolumne County Real Estate Guide (Coldwell Banker Mother Lode Real Estate) almost 9 years ago

Good post! Great comments all the way around.  I don't think there is too much more I could possibly add.  Everything I was going to say was already said.

Posted by Diana Brunner (Keller Williams Realty Monmouth/Ocean) almost 9 years ago

Great post and presented so well. Does anyone remember interest rates at I believe 18%, we will see that again. Yikes, that is a scary thought but certainly a possiblity. We (at least in my area) has bottomed out and interest rate are fatanstic, buy now or say... soulda coulda woulda but I missed the chance!!!

Posted by Dianne Hicks (Realty ONE Group) almost 9 years ago

You make a good case Maureen. I will pass this point of view to my clients.

Posted by Mark Velasco, Listing Agent-Whittier & Surrounding ciities (Sharpstone Realty, Inc) almost 9 years ago

One local banker cited their 3rd Quarter refi lending utilized not one red cent of the banks assets to fund the mortgages. 100% was Fannie Mae money; they're just going to be a service agency.

The banker went onto say using its own resources wasn't profitable at current 4.6% rates--so the original post question makes a lot of sense....and is answered by thinking about the effects of a gallatic Black Hole!!!

Posted by Lynn almost 9 years ago

Maureen, great post. It is like the government built a house made of match sticks. One wrong move and the whole house collapses.

Posted by Steve Andrascik (Lake Mead Area Realty) almost 9 years ago

Really good article Maureen. I have to come back to make it through all of these comments. This stuff is way out of my area of expertise.

Posted by Bryant Tutas, Selling Florida one home at a time (Tutas Towne Realty, Inc and Garden Views Realty, LLC) almost 9 years ago

Great post Maureen. As you say, how long can it continue? I'm not sure if I agree that they have been kept artificially low and is a less chosen investment. But you do bring up that good question of why not, the 3 biggies, keeping anything they originate?

What happens when the government can no longer prop up the housing market?

Posted by Lyn Sims, Schaumburg IL Real Estate (RE/MAX Suburban) almost 9 years ago

Dear Maureen:

Our goverment has said to the banks: Take a seat we will do the rest.  You can bet that they are making money and they need to to wipe out all the toxic debt they are holding.

 

Posted by Elizabeth Lockwood almost 9 years ago

Originally the feds were planning on pulling out of guaranteeing so many loans come this December.  Strong government backing has been part of the housing stimulous plan, along with the $8K tax credit.  From what I am hearing now, this has been extended out to March, with a gradual decrease vs. a sudden pull-out.  With higher risk, banks and other lenders will surely compensate by raising interest rates. Good info to pass on to clients on both sides.

Posted by Lori Malin almost 9 years ago

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