Will lowering mortgage rates to 4.5% really work?

While it's certainly true that the offer of a fixed-rate, 30-year mortgage at 4.5% seems tantalizing to many people, whether or not it would truly spark a housing sales rebound is unknown. For one thing, to get people to act now, it would have to be some type of limited offer. From a CNNMoney.com story:

Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac...

The increased demand for mortgage-backed securities would prompt mortgage rates to drop. That, in turn, would enable homeowners to refinance into lower-cost loans and make it cheaper for potential homebuyers to get into the market...

Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market. The National Association of Realtors, for instance, has called for Treasury to buy mortgage-backed securities.

Meanwhile, a coalition of industry groups have banded together under the "Fix Housing First" banner to call for measures including tax credits of up to $22,000 and the creation of a 30-year mortgage, carrying rates as low as 2.99%...

Experts, however, had mixed views on how much a new Treasury initiative would help homeowners and the economy. Some felt lower rates would help stabilize the housing market by bringing in new buyers and would give those who refinance more money to spend...

But others questioned whether rates would remain low and, even if they did, only a narrow slice of credit-worthy borrowers would benefit...

Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates, he said.

Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments.

Is private equity the answer to the lending squeeze?

With banks hoarding cash and other lending sources trying to remain afloat, some experts have suggested that private equity is the next likely source for development projects, as they've been tapped in the past. For now, however, much of that money remains on the sidelines as investors wait for a bottom that so far remains elusive. From a HousingZone.com story:

Reports have been surfacing that massive amounts of private equity funds are being pulled together to take advantage of the opportunity that the free fall of home and land values is providing. At the time this article was prepared, sources interviewed indicated that the majority of funds out there are sitting on the sidelines...

When these funds do come around, builders — as much as they want and need the cash to move forward with their developments — will want to be cautious. Private equity investors are not the same animal as the local community bank.

“There are different cultures. Builders are entrepreneurial. Financing people are bottom line. It's not like the good ol' days where things were done on trust...Finance people operate deal-by-deal. It's more black and white. Private equity firms are looking for a return, and there's a gap between what home builders have been used to and what these types of lenders are asking..."

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Obama will likely have to expand housing plan

Due to ongoing turmoil in the housing and credit markets, President-elect Obama's plans to fix the housing mess will probably need some serious expanding. From AP via MSNBC:

President-elect Barack Obama is inheriting the worst housing recession in a generation, and the proposals he outlined on the campaign trail won't fix it, so there will be many tough decisions ahead.

His plan includes a 10 percent mortgage tax credit for homeowners who don't itemize their taxes, and a change in the bankruptcy law to allow judges to modify mortgages for financially distressed homeowners...

But those proposals will have a minimal impact on the more than 4 million homeowners who are behind on their mortgages. They probably won't prop up home prices, which are down 18 percent from the peak. Nor will they bolster the confidence of consumers who have lost their jobs or are afraid they will. And Obama's plan won't make banks more willing to lend to consumers with less than perfect credit scores, or tiny down payments.

Reversing the real estate spiral will be an enormous feat.

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Greenspan finally admits he's not invincible

Following months of rhetorical obfuscations reminiscent of his past Federal Reserve meeting minutes that mostly served to deflect mounting criticisms of his now-infamous laissez-faire philosophy, Alan Greenspan finally issued a mea culpa and admitted that he might have been wrong about the housing bubble, although you had to listen closely to catch it. From an L.A. Times story:

Former Federal Reserve Chairman Alan Greenspan told Congress today he was in "shocked disbelief" at the breakdown of credit markets that has triggered "a once-in-a-century credit tsunami" inflicting great damage on the U.S. economy.

"This crisis ... has turned out to be much broader than anything I could have imagined," Greenspan told the House Oversight and Government Reform Committee in his first congressional appearance since financial markets began melting down last month. "Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment."

Greenspan, who stepped down as Fed chairman on Jan. 31, 2006, after nearly 20 years in the position, reiterated comments he made early this year about his surprise that financial markets had allowed the credit crisis to develop. And under questioning he admitted that the crisis showed flaws in his strong free-market ideology .

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Housing market to worsen without bailout plan

So what happens if there is no consensus on a plan to unfreeze the credit markets? For starters, a frozen real estate market. From an AP story:

The recession in the U.S. housing market is expected to be deeper, longer and scarier if lawmakers continue to be deadlocked in their effort to pass a $700 billion bailout of the financial industry...

U.S. home prices have already fallen about 20 percent since their peak in early 2006 and are expected to sink another 10 percent over the next year, according to Mark Zandi, chief economist with Moody's Economy.com. New data for July out Tuesday from the Standard & Poor's/Case-Shiller home price index will likely show more price declines in cities coast to coast.

Without a broad government response to the credit crisis, the economy, which many believe to be in recession or near it, would certainly worsen, analysts say. Unemployment, currently at a five-year high of 6.1 percent, could rise to double-digit levels as credit dries up.

"Businesses are going to begin shuttering operations and laying off workers," Zandi said. "That will hammer all consumer spending and housing demand."

Existing home sales were down almost 11 percent in August, compared with a year ago, while new home sales tumbled almost 35 percent. There's more than a 10-month supply of homes on the market.

Making matters worse, many potential homebuyers are having a hard time qualifying for a mortgage. Lenders, burned by record defaults and foreclosures, are only giving loans to borrowers with the best credit.

One silver lining, however, is that falling home prices have made homes more affordable for working families. And nervous investors helped push down the average rate on a 30-year, fixed rate mortgage to 6.12 percent on Monday, down from 6.22 percent on Friday, according to financial publisher HSH Associates.

But plunging stock markets and epic bank failures are bound to have a negative impact on home shoppers' psychology...

The credit crunch has crippled many homebuilders' ability to stay in business, and the industry has been among those calling on lawmakers to pass the financial rescue measure.

Most of the large, public homebuilders have been hoarding cash and aren't facing funding problems. But many smaller, private builders have seen their access to credit choked off, leaving the fate of building projects in limbo, said Nishu Sood, a Deutsche Bank analyst.

Private companies are "in a terrible condition right now," Sood said. Their ability to conduct business has been "effectively shut off."

Builders have lobbied in favor of the bailout in hopes it will ease the sector's access to financing and lift worries about the economy.

Industry groups said the House's failure to pass the bill Monday was a grave mistake, and the action shocked Wall Street, sending the Dow Jones industrial average down 777 points. House lawmakers were planning to reconvene Thursday to try again instead of adjourning for the year as planned...

Still, many Americans were baffled by the need to bail out Wall Street banks. And consumer groups -- which long warned about reckless lending practices -- were irate about the bailout, saying it didn't do enough to stop foreclosures and rewarded the institutions that fueled the boom in risky lending practices.

"The financial institutions that got us into this crisis are asking to be bailed out," said Michael Calhoun, president of the Durham N.C.-based Center for Responsible Lending, who called the government's actions a "textbook case of how not to manage a crisis."

Plus, consumer advocates said, if the Bush administration had been more aggressive last year in requiring loan modifications for homeowners in default, the crisis could have far less severe.

What? You mean to say the voluntary plan to initiate work-outs with borrowers didn't work? Well, when was the last time any business did anything voluntarily that wasn't in its own short-term interest. 1400?

Poll shows Americans almost evenly split on housing bailout

If you read the many housing blogs hosted by angry renters, you'd think that there was overwhelming resentment towards any bailout of people who bought more homes than they could reasonably afford. However, according to a recent poll conducted by CNN/Opinion Research, 49% of respondents actually support some type of special treatment for homeowners in danger of losing their homes vs. 48% against it. From a CNNMoney.com story:

Americans remain split on whether homeowners about to default on their mortgages should receive special treatment to help them keep their houses, according to a new CNN/Opinion Research Poll.

The poll finds 49% of Americans believe such homeowners should receive special treatment, while 48% feel homeowners should not get assistance. Three percent of those polled had no opinion...

Congress also appears split on the issue. On Wednesday, the House began debating Democrat-sponsored legislation that would let the government back loans for homeowners facing foreclosure and would reduce the principal owed on those mortgages. Many Republicans oppose the bill, and President Bush has threatened to veto it.

The proposed legislation would allow the Federal Housing Administration to insure up to $300 billion in new loans over four years.

In order to qualify, lenders would have to cut the debt to no more than 85% of the homes' appraised value. If the FHA-refinanced loans defaulted, the FHA would pay the lender the outstanding principal.