Housing Market Stimulants
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housing market, stimulants February 21st, 2008Last week, the Bush administration issued two remedies for a badly ailing housing industry: a provision in the stimulus package for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to begin (temporarily) accepting so-called jumbo loans, and a plan called Project Lifeline that will delay foreclosures.
Cynics liken these policies to giving cough drops to a pneumonia patient. However, to more optimistic observers, they will provide a much-needed inducement for the market to heal itself.
Banks can help
Project Lifeline stipulates that the six banks holding approximately one-half of the nation’s mortgages — Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Countrywide (NYSE: CFC), Washington Mutual (NYSE: WM), Citigroup Inc. (NYSE: C) and Wells Fargo (NYSE: WFC) — will give a 30-day pause (a lifeline) in the foreclosure process to borrowers who are delinquent by 90 days or more, creating a window of opportunity for borrowers to renegotiate terms.
This won’t solve the problem. Most of those who are foreclosed upon simply cannot afford the property. A delay in the foreclosure process or a tweak in the loan terms won’t entirely change that fact. However, it won’t do any harm, and it will prevent some foreclosures.
Call in the mortgage cavalry
Of far greater impact is the economic stimulus package signed last Wednesday, which includes provisions for Fannie Mae and Freddie Mac to accept larger loan amounts. Fannie and Freddie are federally chartered corporations that don’t lend money to homebuyers directly. Rather, their role is to purchase loans, conforming to certain guidelines, from originating lenders in the secondary market. The new provision increases the maximum mortgage loan amounts that FNM and FRE will buy from lenders from $417,000 to $729,750.
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