Most bubble heads know the current real estate market is being kept alive through massive amounts of "life support" from the government. Everything from tax credits, to nearly no money FHA loans, and lets not forget that the government is purchasing the MBS's which is keeping interest rates quite a bit lower than they would other wise be.
What happens when these programs end? The first to go will be the MBS purchase program. Will Wall St. start buying these things again? With the interest rates many of these things have it's hard to say. There's also a great deal of risk in these securities. Sure they are better than the junk they were buying a few years ago, but what happens if the prices ratched down again? This program is due to end in March. The current estimates are for the interest rates to go up anywhere from .5% to 1.5% when the gov pulls the plug. When the governments stops buying these the banks have two option's, sell the loans or keep them. They can't really afford to keep them. They would quickly run out of money to lend if they had to keep the loans. But can they sell them?
Problem 2 for the market is the looming end for the Tax Credit. They have already come out and said "this is it, no more extensions to the credit". How many buyers will this kick out of the market. Personally I don't think it will stop anyone from buying that wants to buy, however I do think they are going to be pulling in some buyers that may have waited till next year. Like the cash for clunkers, we may are probably stealing tomorrows buyers. This could mean a drop off in sales as the credit ends. Another consequence is going to be a drop in spending by new buyers. Most new buyers are taking that $8k and buying new stuff for the new house. They are pouring patios, buying furniture etc. That's $8k less they will be spending. What will that mean for the furniture stores and the home improvement stores?
The credit basically ends in April. You have to have a signed contract by the end of April and you need to close by the end of June. By July most of the government support should be gone. That should make for an iteresting fall. Of course should the preverbiale turd hit the fan the government will either reinstate these programs or come up with new ones.
1 comment:
You write: "When the governments stops buying these the banks have two option's, sell the loans or keep them. They can't really afford to keep them. They would quickly run out of money to lend if they had to keep the loans. But can they sell them?"
My Response:
Well no, they cannot sell them as there is no demand for them.
I think they will keep the loans on the books as "assets"; under FASB 167 and FASB 168, the bank can value these at mark-to-manager's-estimate and not mark-to-market.
Also, if the home is under-written as an Freddie Mac or Fannie Mae loan, the bank can transfer the loan off balance sheet to a Specialized Investment Vehicle, SIV, and simply make reference note to it as an addendum in its annual financial report. The logic here is that the loan belongs to the GSE and not the bank.
And it is my understanding that the bank need not pay the property tax.
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