Proposed Economic Stimulus Package Proposals Affecting Real Estate Market

Last week, in an unscheduled meeting, the Federal Reserve lowered its federal funds rate[1] and discount rate[2] by 0.750% point citing continued concerns about a weakening economy and uncertainty in the financial markets.  The Federal Reserve's statement cited "Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households."  Since, market reports continue to indicate a deepening housing market contraction and a continued softening in labor markets.  The Federal Reserve action was to try to restore confidence in the U.S. economy.  But, investors seemed uncertain that this action was enough to restore confidence.  With a roller coaster ride in the market, the market ended in the black for the week.  Expectation is still set for a 0.5% decrease on January 30th when the Federal Reserve meets again.  If the Fed action is not close to this expectation, be ready for another roller coaster ride in the market.

President Bush and Congress also announced an economic stimulus which Federal Reserve chairman Ben Bernanke has endorsed to help restore confidence.  The press has mostly focused on tax payer rebates, but what is concerned to me is how this package will affect the real estate market.  The proposed economic stimulus package proposes to increase the conforming limit, at least for a brief period.  Congress and President Bush have agreed, but have not yet voted, on a 1-yr increase in the conforming loan limit to approximately $730K. This limit would also apply to FHA loans too.  There is not a lot of detail but there is a lot of confusion as to the exact new loan limit, will the limit apply only to high cost housing areas, or everywhere, and what is the definition of a high cost area.  Not all government agencies support this move, or to make these moves as quickly as President Bush and Congress propose.  The Office of Federal Housing Enterprise Oversight, who oversees FNMA & FHLMC issued a statement suggesting we need to "ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place."  If you have followed how government agencies work, then you might expect that some of the economic stimulus proposals will not happen soon.

Current reports seem to indicate congress will be ready to enactment the stimulus package (or part of it) by mid-February, but a more realistic time would likely be by early March.  This is great news for a loan originator like me for several reasons. 

•  Temporary items like the increase in conforming limits are difficult to rescind after a year, thus this may be a long term stimulus to my business which is focused in a "high cost area".

• The current proposal includes the ban certain mortgage loans such as the option arm mortgage.  I actually have no problem with this mortgage if it is used correctly.  But so many loan originators sold this loan to the wrong borrower for the wrong reason and with out the proper knowledge to use it correctly.  Many of these borrowers with option arms are now or about to go into foreclosure.  So, I believe that in the long run, we are better off without this mortgage program.

•  I have heard that the economic stimulus bill would allow some homeowners to refinance their homes without being responsible for part or all the  penalties or unnecessary fees.  This will be a controversial issue and will be hard to get agreement on.  But, we need something, even if temporary, to help out a lot of borrowers and restore the real estate market..

[1] The federal funds rate affects the rate consumers pay on credit card debt, home equity lines of credit and auto loans.

[2] The discount rate is the cost banks pay to borrow directly from the central bank.