The Ultimate Fix

By
Real Estate Technology with BoomTown

Much speculation regarding the Future of Housing Finance and the overall housing market around the news lately.  I penned a couple articles for HousingWatch (here and here) on the conference of the same name that took place at The Treasury last month, they’re good prerequisites to whats written below.

While there were many threads of thought that could turn into policy when Congress is presented a proposal in January 2011, I rub my Conjecture Ball and foresee:

The Government sponsored artists currently known as Fannie and Freddie shift from hybrid private/Government controlled entities to straight up Government controlled.  OK, it’s not really speculation when Timmay Geithner states: “We’re not going with a system where private gains are subsidized by taxpayer losses.”  Anyway, they abandon the practice of implicitly guaranteeing (~90% of all) mortgages today in favor of an explicit guarantee that reads like an insurance policy.  So, the Government will provide mortgage insurance for a fee instead of the Freemium model currently enjoyed by financial institutions.  That model didn’t work out real well for anyone except big ass banks.  Our Government hasn’t been real savvy when it comes to financial engineering…free really shouldn’t be the new business model, with all due respect to Chris Anderson.

Government Sponsored Mortgage Insurance (GSMI).  This is interesting, really.  The premiums for something like GSMI would be paid by the individual mortgage holder and the policy would insure the actual asset, not the business entities that hold them…suitably addressing Mr. Geithner’s statement above.  Fannie and/or/nor Freddie can thus go back to performing the duties they were essentially created to carry out: To create affordable housing for the masses and mitigate risk on their behalf.  They could still maintain, even increase their influence on the market whilst scaling back on the actual buying of mortgages…insuring parts thereof instead.  

Theoretically this shift would provide enough incentive and security for the private sector to gradually re-enter the mortgage space and fill any vacuum created by the Governments very, very gradual decrease in purchasing mortgages.  A new fee like GSMI means other fees and current tax deductible benefits currently innate to a mortgage take a hair cut…like the mortgage interest deduction.

The powers that be are also focused on providing suitable, affordable housing…just not necessarily through home ownership.  As such, rental market dynamics are being primed for adjustments. Multi-family housing loans made accessible and desirable due to favorable GSMI terms seems highly plausible.  There are likely to be other subsidies into the rental market from initiatives like PETRA to help shore up this sector of affordable housing.

If you continue to listen closely and look closer, the landscape is being primed for The Ultimate Fix…

“The only way to fix it is to flush it all away...” - Tool

So- Over the next six or so months the housing market will continue to tank as financial institutions release huge amounts of distressed (shadow) inventory into the market creating supply that far exceeds the ability to consume.  This will exert extreme downward pressure on property values.  The number of banks will continue to contract.  Homeowners will continue walk away from their houses.  The National Association of Realtors will continue to tell anyone who is listening that its a great time to buy.

These sour conditions will be amplified with the seasonal slowdown to such a point where everyone is clamoring for additional Government ‘intervention’ or stimulus or Print More Money!!  Except I don’t think there will be much, if any, of that.  There really isn’t much left to be done except to allow the existing system to flush itself and prepare for what comes out the other side.

Whats on the other side of this economic enema?  Explicit Government guarantees via the artists formerly known as Fannie and Freddie to keep the cost of credit within reach of the qualified rather than the entitled, increasing private money participation, and a retooled rental market system to support all the displaced homeowners.  Dead inventory will be channeled off through a series of initiatives like HomePath.  The housing market and property values drop below this ‘double dipped’, false floor we’ve been dancing on for almost 2 years…and there is no where to go except up.  Which equates to a real recovery and sustainable growth which will lead to inflation and all those other problems that we can worry about that sometime post 2012, assuming that whole Mayan prophecy thing doesn’t absolve us of any future responsibilities.

This painful process constitutes a necessary de-leveraging of an economic system thats based on a debtor society which has been taught to borrow/spend beyond it’s means.  While it may hurt and otherwise cramp our very American style, its really not the end of the world as we know it.

 

 

Originally posted, unabridged, at The XBroker

 

Comments (10)

Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

I definitely believe that my market is headed for the dreaded double dip.  We aren't seeing any huge spikes in inventory but we are seeing first time buyers pull away and all that pent up demand exhausted from the tax credit expiring.

Sep 13, 2010 08:46 AM
Susie Blackmon
Ocala, FL
Ocala, Horses, Western Wear, Horse Farms, Marketing

It's a pleasure to read a no fluff masterpiece.

Sep 13, 2010 09:33 AM
Greg Nino
RE/MAX Compass, formerly RE/MAX WHP - Houston, TX
Houston, Texas

Always a nice read Jeff.. leaning on the feature button, as usual.

Sep 13, 2010 12:50 PM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

I think that the 'shadow inventory' will continue to trickle rather than flood... of course, it will vary by region.  I REALLY hope that the government doesn't keep trying to fix things. 

Sep 13, 2010 03:43 PM
Steve Davis
Davis Coastal Properties - Carlsbad, CA
Carlsbad CA

The leaders - if there are any - need to just pull that lever and flush the system. Most likely will not happen till after November - and then wait to January so they will not be Scrooge!

Sep 13, 2010 05:15 PM
Jeff Corbett
BoomTown - Charleston, SC

Thx for the thoughts...

@Lane- They've been trickling...I believe the floodgates are opened to move what is a huge amount of current inventory, primarily to make room for more.  The effects of which will vary right down to the street level :)

 

Sep 13, 2010 05:45 PM
Eileen Liles
970-216-0530 http://WeSellDeltaCounty.com - Cedaredge, CO
Macht-Liles Real Estate Group - Cedaredge, CO

Love your plain talk, Jeff.  I think you are right on the mark.  We really don't have much shadow inventory here - in such a small town/county, we pretty much can keep up with what has been foreclosed on, but think we will see a big increase in short sales.  Heres hoping November elections will give people a little comfort and certainty that has been severely lacking for the last couple of years.

Sep 13, 2010 06:14 PM
Jack Mossman - The Nines Team at Keller Williams in Stockton
The Nines Team At Keller Williams - Stockton, CA
The Nines Team at Keller Williams in Stockton

Jeff ... there continues to be demand in some regional areas ... the demand is mostly "if only" ... and the problem is that we don't have the ability to grant wishes .... and neither does the government.  So why are we trying to end this recession by getting back to where we were when it started?  Great post - and the video was equally unsettling. 

Sep 13, 2010 06:15 PM
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Hi Jeff, I was out of town when you posted this, so glad Fran reblogged it. As usual I think you are right on the mark at least for my area.Interesting about rents as Rob Hahn has written previoulsy on rentals and the government.

It would be so much easier if the Banks would just reduce the principal of certain homes, NOT ALL.  Where if the homeowners who qualified on 2 incomes, and one lost their job, could renegotiate their mortgage to current value and income level of the one so they could stay in the house and not have to rent for 3 years.

 

 

Sep 14, 2010 02:08 AM
Denise Hamlin, Broker/Owner
Cardinal Realty ~ 319-400-0268 - Iowa City, IA
Helping Happy Clients Make Smart Choices

Hi Jeff ~ All I want to know is how come this isn't featured yet?

As usual you don't mince your words. I think you hit the nail on the head in the last paragraph, although I do actually think it is the end of the world as we know it. We cannot go back to the way we were, because the notion that you can consistently live beyond your means is just plain wrong. The consumer driven economy needs to evolve into something different. I think the term "new normal" is over-used, but perhaps also fitting to describe whatever comes out of this shambles.

Sep 14, 2010 02:28 AM