Housing Savior? The Fed & The White House To The Rescue

On August 31st, the White House announced plans to help homeowners facing foreclosure. The President’s move occurred on the heels of the Federal Reserve’s action to lower the discount rate and provide billions of dollars of liquidity to the banking and loan system. Though these actions should have little to no direct impact on Montecito residents, the indirect benefits may be substantial. If nothing else, in today’s highly charged political environment, these moves will give plenty for both Democrats and Republicans to talk about, though by our gauge both groups will be silently happy with the policy.

What did the President announce and mean in his recent address?

He announced that:

1) A new program is being launched called FHA-Secure. This program will allow homeowners with good credit history who cannot afford their current payments to refinance into FHA-insured mortgages. (The limit for Santa Barbara County single family residences is $362,790, according to the FHA website.) This will allow struggling families to potentially refinance to lower monthly payments through the new programs being created.

According to Bob Maloy, CPA and tax partner of Bartlett, Pringle & Wolf, LLP, “we understand that the President is asking Congress to temporarily reform bank loan forgiveness taxation. Under current law, if a bank modifies your mortgage and forgives part of your loan, the tax code treats that forgiveness as taxable income.” In this case, since it is the government that is trying to help people lower their expenses by restructuring their debt, it only makes sense that the government would not hit them with a tax bill on the other side of the transaction.

A new foreclosure outreach avoidance initiative is also being launched. According to the White House, “the goal of this initiative is to expand mortgage financing options, identify homeowners before they face hardships, help them understand their financing options, and allow them to find a mortgage product that works for them.” This program is intended to work in conjunction with community organizations and the mortgage industry.

What does all of it mean to those of us on the Central Coast?

As I mentioned earlier, this should have little to no direct impact on the Montecito housing market, but it does play out indirectly on Montecito residents.

For starters, I do not believe Washington is afraid that people who overextended themselves will lose their homes, or that the banks will profit less or that some lenders and home builders will go out of business. The prominent issues for Washington are as follows:

Historically speaking, the stock market and the economy have never been strong during a prolonged housing decline.

According to the US Government Consumer Expenditure Reports, approximately two-thirds of our economy is driven by the “average American consumer.” That means it does not take much of a change in discretionary spending in either direction to either heat up or cool down our economy. As the “baby boom” generation has aged and moved into “peak spending years,” according to the HS Dent Foundation, the consumer expenditures and our economy have been in virtual lockstep with each other (see chart #1). A slowdown in consumer spending caused by current housing concerns is a significant issue that could, if not handled, lead to a possible recession.

The Local Fallout

So how did the White House announcement and the Federal Reserve’s recent moves play out locally in the Tri-County?

First, this housing issue is not a localized event; it is nationwide phenomenon. The problems are pervasive enough that the “crisis” has adversely impacted the stock and bond markets fairly significantly over the past several weeks. Interwoven into the mix have been the simultaneous impacts to the foreign markets and overseas interest rates.

Second, the government clearly wants to address the issue proactively, rather than wait to see if it will work itself out over time. Wall Street, in response, has reacted favorably to any assistance that can help resolve this national predicament.

Third, people should expect a lot more bureaucratic initiatives that will be intended to help avoid this situation in the future.

Fourth, the tri-counties are home to two significantly impacted corporations that happen to be two of our area’s largest employers:

a) Countrywide recently received funding help from Bank of America, but it still has significant issues to address.

b) Amgen recently announced layoffs.

Not only do these companies inject a lot of money into our local economy via salaries, they also occupy vast amounts of office space. This could either mean an upswing or downswing in rents for investors, depending on where you’re invested. Investors who own apartment buildings south of Montecito may have an opportunity to increase rents if people need to sell their homes and move into a residential rental space. On the other hand, if Amgen or Countrywide sublet any of their “extra” commercial buildings, this could drive down rental prices for those who own commercial property. At the same time, Countrywide’s and Amgen’s needs may result in an opportunity for those who own other businesses to lease space at a lower cost.

One cannot argue with the fact that speculators have run into significant issues during this time. I have even seen it in my own work locally with people who started new construction or tried to sell an existing house too late for today’s slowing market. Values have declined in the broad real estate market from the highs of several years ago; and with mortgage money becoming “tighter” and more expensive, those trying to sell a home are finding fewer people are able to qualify for loans. Some borrowers are finding it difficult to obtain any loan; others who invested in 2nd and 3rd trust deeds in the local market are going through a “nervous” time.

In Montecito, loans are less of an issue because the ultra affluent often purchase property with a substantial amount of cash vs. debt. However, if things do not improve nationally and locally it’s hard to argue that a “lowering real estate tide” coupled with a possible economic downturn will not adversely impact Santa Barbara and Montecito. It’s rare to find many “rising boats” in a “lowering tide.”

On the bright side, we have a rather resilient economy in the U.S., with a supportively strong global economy. Interest rates are still historically low and corporate profits are robust. The foreclosures recently reported in the press are high in total numbers, but they still represent a relatively low percentage of the overall housing market.

Some Pain, Some Gain

According to recent reports, home ownership in the U.S. is the highest of all time. The baby boom generation is spending money like never before, and since 9/11, “consumers” has been rather generous with their wallets. Now that the government has made a rather bold move to help (although they are not going so far as to say that this is a “bailout”), it’s possible things will get better. Most people are still waiting to see if the Federal Reserve will help the situation further by lowering interest rates at its next meeting. That could make an even bigger difference than the FHA-Secure program.

Albeit, there will still be pain and many people who cannot afford their homes will still lose them. It will be debated how financially devastating it really is for someone who “loses” a home they financed at 100%. More homebuilders and finance companies will also not survive this turn of events. Additionally, those who speculated in the real estate market and leveraged themselves too much may substantially lose (especially in the Florida condo market). However, where there is “pain,” others often find opportunities.

At the next cocktail party, you may find it interesting to hear how the Democrats and Republicans debate the most recent FHA move by the White House. Traditionally, Republicans despise government intervention in favor of free enterprise and the natural economic selection process. However, this time, the issue is impacting everyone’s investments across the board. On the other side of the aisle, Democrats traditionally favor government intervention. However, this helping hand is coming from a president they despise with fervor. You may want to pay close attention as circumstances continue to unfold.