The Fed announced yesterday that it will continue to buy mortgages, thereby continuing to supply a market for 80% of all new mortgages being generated. This is seen as good news by the real estate industry because, they acknowledge, without the federal government to back it up, there is no mortgage market.
“We definitely need help from the government,” says Lee Barrett, president of Century 21 Barrett, a real-estate brokerage firm in Las Vegas. “I don’t think the market can make it on its own.” He also hopes Congress will extend tax credits for home buyers due to expire at the end of November.
There seems to be no investor appetite for used (distressed) mortgages as evidenced by the fate of several IPOs which were peddling them and I suspect that same avoidance applies to new mortgages as well. So don’t count on the Fed ending its mortgage program soon, not even next year, when it’s scheduled to do so. But if the only source of financing for home purchases is the federal government’s printing press, we are in a world of artificial demand, propped up by make-believe dollars and I, at least, don’t see how that continues indefinitely.
Chris wrote: “we are in a world of artificial demand, propped up by make-believe dollars and I, at least, don’t see how that continues indefinitely”…
and Retired IB’er adds: “or ends well.”
We have another problem. Referencing our shadow inventory article yesterday, we get this little nugget:
From Bloomberg: Housing Crash to Resume on 7 Million Foreclosures, Amherst Says
The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said.
The “huge shadow inventory,” reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.
…
“The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” they said.
The report suggests that modifications might help – but not much. From the report:
We don’t think they can help significantly. The 12-month recidivism rate on modifications has historically been about 70%. … We have argued … that HAMP modifications are unlikely to be successful in the long run as it does not address negative equity, the single most important determinant of default. And the borrower will still face payment shock as the payments begins to ramp up after the 5 year period in which the payments are fixed.
Let’s say we are wrong and the HAMP modifications work much better than older style modifications. How much of the 7 million unit overhang can be cured by modification? The answer is “not much.”
The analysts estimate the overhang could be reduced by about 1 million units if the modifications are more successful than historical modifications.
However HAMP could spread out the flow of this shadow inventory over several years. So the size of the wave of more inventory is uncertain.
I will pay 1 million dollars to anyone who can plausibly explain to me how negative equity can be refinanced.
One condition: the financing on the underwater part of mortgages cannot be of the “Wimpy”, unsecured variety (i.e., I will gladly pay you Tuesday for a hamburger today.).