I just finished a webinar at John Burns Real Estate Consulting that provided some insight and clarification about the reasons home buyers are not buying. Some of this is common knowledge but I like to have good reference data available in any discussion with listing clients. The source of this info is the John Burns Real Estate Consulting Survey of 240 Home Building Executives, December 2008.
The reasons are ranked by the percentage of buyers impacted
The good news is the current actions by the govt. and plans for future actions, assuming they are approved, appear to be focused on the economy and jobs as well as increasing money supply in the market to provide funds for home loans.
My concern is for the govt.'s execution and their ability to establish accurate measures of effectiveness to use for program evaluation and revision of their plans as required to properly address and resolve these issues.
Facts
Historically, our bankruptcy laws have permitted court approved adaptation of every type of debt obligation except for mortgages secured by single-family principal residences.
Mortgages and mortgage terms are not modified by bankruptcy judges. Debtors propose the modifications, if the modifications are acceptable lenders agree, and then the bankruptcy judge approves the modification if it meets the requirements set forth in the Bankruptcy Code.
Mortgage servicers generate revenue on defaulted mortgages for single-family principal residences by assessing fees and penalties.
Old Assumptions
Mortgage lenders claimed that if their losses on principal residences were limited, then they would pass on the savings to home buyers in the form of lower interest rates. Their rational was that this would encourage homeownership.
Allowing the reduction of the principal on the mortgage for a single-family principal residence would make mortgage backed securities less valuable.
New Assumptions
Mortgage lenders often lose 40-50% of the value of their loan through foreclosure.
If Bankruptcy laws were revised to allow debtors on single-family principal residences to re-negotiate the mortgage principal and terms with their lenders then lenders would have one more tool to use in their efforts to manage risks, reduce their losses from foreclosures, and maximize overall return on investments.
Conclusion
There is no empirical evidence to show that:
If the new assumptions prove to be valid then:
Recommendation
The newly proposed legislation to allow debtors to re-notiate their mortgages on single-family principal residences would provide a much needed alternative that would reduce lenders' losses, allow homeowners to stay in their homes, and help stabilize the housing market. It deserves no less than a fair and impartial review and a straight up vote on its merits.
Although the process is very opaque, the Treasury Dept. is assessing the condition of the nation's 8.500 banks and assigning them a rating of one to five where 1 means the Treasury Dept. will most likely make an equity investment in your bank and 5 means that it most likely wont. I explained this in my previous blog.
Upon further reflection it occurred to me ask: How can the public at large manage the risk to personal and/or business assets deposited in their bank if the Treasury Dept. doesn't make this information available for public consumption. The position the Treasury Dept at present is that if they release this information then it may cause a run on these banks which would make their failure a certainty.
Well thanks to ProPublica, an independent non-profit newsroom that works in the public interest, you can know if your bank received an equity investment from the ESSA funds. The ProPublica report is at the following website http://www.propublica.org/feature/bailout-bucks-to-banks-1028 ).
Although the assessment of all 8500 banks is not complete the criteria appears to favor banks that are "best off" and banks deemed "too big to let fail." At this time, what we know is that banks that have received TARP/ESSA funds are among the "best off" subset and/or the "too big to fail" subset of all banks and that members of the public who have deposited their personal and/or business assets with these banks can take comfort in knowing that their funds are at a lesser risk than banks that have not yet received funds.
The larger banks recognize their advantage and know that receiving these funds will make their banks a "safe harbor" when the public at large embarks on a flight to safety. Receiving more private sector funds from the public at large will improve their positions, their ability to make acquistions and loans; and improve their bottom line.
If your deposit is less $250,000 in an FDIC insured bank then your deposit is insured. For more details on FDIC insurance protection go to http://www.fdic.gov/deposit/deposits/insured/basics.html .
I, for one, want my assets in an FDIC insured bank that the Treasury Dept. has determined to be one of the "best off" or "too big to fail" banks. It would be an appropriate time to assess your own tolerance for risk.
ProPublica, an independent non-profit newsroom that works in the public interest reports that 278 billion dollars were allocated to 282 banks. Their report is at the following website http://www.propublica.org/feature/bailout-bucks-to-banks-1028 ). However, we still don’t know how these funds are being used or if they are being used appropriately to restore liquidity to the financial markets and stem the tide of home foreclosures
The Treasury Dept is using the US supervisory CAMELS ratings to help it decide which of the nation’s 8.500 banks will receive bank equity investments from the TARP funds authorized by the Emergency Economic Stabilization Act (EESA) and which banks will not. The acronym CAMELS represents the components of a bank’s condition that are assessed prior to categorizing the banks on a scale from 1 -5 where 1 means the Treasury will most likely make an equity investment in your bank and 5 means it most likely wont.
The New York Times states: “The criteria being used to choose who get money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive” because the criteria appear to favor financially best off banks and banks too big to let fail. Alternatively, the banks that are at risk and not likely to receive an equity investment are likely to fail.
Some banks received equity investments under the understanding the banks would try to find a merger partner. Allegedly banks that receive equity investments are also “required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital. If this is the policy of the Treasury there is no apparent evidence that this is the practice. Consequently, the lack of plans and measures of effectiveness has created a lack of transparency, timely reporting, and accountability.
We deserve better and we need to hold members of the Treasury Dept. to a higher standard of performance if the public at large is going to see any benefit from these investments.
By the date of President Roosevelt's inauguration, 4 March 1933, we were in the depth of the Great Depression. The citizenry was panicked; there had been a run on the banks; and nearly all of the nation's banks had temporarily closed.
To paraphrase our present Secretary of the Treasury, Henry Paulson: There was a lack of liquidity.
I have included links below to 2 one page speaches given by FDR. He was a skilled communicator who spoke frankly and chose his words carefully. You'll appreciate the irony when you realize that these same words could be used today.
FDRs first inaugural speech 4 March 1933. "The only thing we have to fear is fear itself."
http://millercenter.org/scripps/archive/speeches/detail/3280
FDRs speech on the Banking Crisis 12 March 1933. He urged his radio audience to have faith in the banks and to support his plan.
http://millercenter.org/scripps/archive/speeches/detail/3298
I'm curious to know what President Elect, Barack Obama will say in his inaugural speech.
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An Oregon licensed Realtor & Sole Proprietor, I am focused on building relationships, obtaining current market & property specific information from reliable sources, & providing professional service.
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