A New Crisis?

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Central banks warn of new crisis

The Bank for International Settlements warned governments that if budget deficit issues are not addressed decisively, the very same measures meant to tackle global recession could end up becoming the next crisis. The BIS, which acts as a bank to central banks and a discussion platform for policymakers, said reforms of the financial system remained key to prevent further crises. In its annual report published today, the BIS said, that the global economy as well as financial markets were on the mend, though the recovery remained fragile in the advanced economies and in the euro zone the debt crisis put the recovery at risk. Global leaders meeting in Toronto agreed to take different paths for shrinking budget deficits and making banking systems safer though Washington has warned against cutting too fast. “We cannot wait for the resumption of strong growth to begin the process of policy correction. Delaying fiscal policy adjustment would only risk renewed financial volatility,
market disruptions and funding stress,” BIS general manager Jaime Caruana told the bank’s annual general meeting.

The BIS said if the extraordinary measures were kept in place for too long, policymakers ran the risk of creating “zombie” banks or companies, dependent on direct support. The banking system was still far from sound, as recent profits from fixed income and currency trading and the low interest rate environment were hard to repeat and not all crisis-related losses may have been booked. “But the longer that policy rates in the major advanced economies remain low, the larger will be the distortions they create, both domestically and internationally,” the BIS said. The Greek debt crisis had highlighted that many governments had to consolidate their finances immediately as highly indebted countries would not be able to rescue banks as a buyer of last resort in another crisis.

Diana Olick – Home Tax Credit Closing Extension Dead

“The proposal was simple and necessary: Extend the closing date for the home buyer tax credit from June 30th to September 30th — not the tax credit itself, which required buyers to sign a contract by April 30th, just the closing date. Anybody who has ventured into the real estate market in the past year knows that tighter lending standards, new appraisal rules and general banking backlogs are making a two month contract-to-closing period very difficult. This week the chief economist for the National Association of Realtors said 25 to 30 percent of the buyers who signed in April will not get to closing by June 30th; that translates into roughly 180,000 home purchases. The credit is $8000 for first time buyers and $6500 for repeat buyers.

This is not to say that all those buyers will pull out of the deals, but they will lose the incentive that may have gotten them to the table in the first place. June 30th is still the current deadline, and that means an awful lot of buyers will not get what the government promised, and many will likely pull out of deals. Here you have a federal tax break, designed to stimulate a housing market in total freefall, but it somehow fails to recognize just how bad the current market conditions are. The housing industry spent millions and millions of dollars lobbying Congress for said stimulus and its extension. So how is it that nobody mentioned that in today’s market it can often take longer than 8 weeks to close on a house?”

G-8 Warns Recovery Remains Fragile

The Group of 8 industrialized countries agreed the global recovery remains “fragile” but made few suggestions about how they would strengthen it. The joint communique at the end of a two-day G-8 summit in Huntsville, Ont., said progress is being made to restore the health of the global economy and financial system. But it acknowledged continued strains. “This economic crisis exposed and exacerbated vulnerabilities already embedded in integrated global economies,” the statement said.

The G-8 includes the U.S., Russia, Canada, Britain, Germany, France, Italy and Japan. The G-20 includes all the G-8 plus big developing countries including China, India and Brazil. G-8 leaders used much of their public statements to address what they would try to do in the G-20, where the main drama is the pace at which stimulus spending will be withdrawn. While the other countries talk of reducing debt-to-gross domestic product ratios by 2016, the U.S. talks more vaguely about cutting deficits and debts in the “medium term,” meaning three to five years from now. Over the years, the G-8 has focused increasingly on development issues, partly to damp criticism that industrialized nations were giving short shrift to the rest of the world. G-8 initiatives have given a political boost to debt relief in poor nations and increases in foreign aid, though never enough of a boost to satisfy critics on the left.

Now for our real estate education section…

Freddie and Fannie Delisted! What Does it Mean for Real Estate?

You might have missed this little item in the nightly news report; government home mortgage giants Freddie Mac and Fannie Mae are delisting from the New York Stock Exchange. Despite $145 billion in taxpayer funds spent to shore up the pair, shares have dropped so significantly they no longer qualify for inclusion on the exchange but will continue to be traded via the infamous bulletin board instead. In order to participate in the traditional exchange, shares must trade above $1…Fannie has been below that level for well over a month making delisting a legal necessity. Freddie has continued to struggle at just over the $1 level but will also be delisted given the eventual prospects. Given the difficulty of becoming profitable…much less an actual attempt to repay the government aid, it’s unlikely any serious effort to revive the failing entities will be forthcoming.

Since January of 2010, Freddie and Fannie (with some help from the Veterans Administration) have underwritten nearly all new home mortgages for the year; throw in the assumption of non-performing assets and bail-outs and the combined total for the defunct duo now accounts for nearly half of all the mortgages in the entire nation. With bank lending standards showing little sign of relief, experts are wondering what the delisting of Fannie and Freddie may mean for the future of a struggling real estate industry.

Aside from the loss of shareholder value…which is expected to be significant as neither entity has retained any level of significant value…the immediate impact is expected to be minimal. “Business as usual” is the anticipated motto for the time being. However, experts predict the long term consequences could dramatically alter the landscape of mortgage lending for years to come. There is significant support for privatizing the role of Freddie and Fannie while liquidating assets to recoup some of the anticipated $1 Trillion in losses currently shouldered by the tax payers.

But what would that really entail? According to AEI think tank guru Peter Wallison, a combination of liquidation followed by privatization is the preferred method of reform and would allow both to compete in the marketplace for securitization and the goal of providing affordable housing. Bernake is also an advocate of the privatization plan but suggests the prior operational model was unsustainable prior to the collapse but suggest the new footing would establish a firm foundation going forward. Critics argue this is a rehashing of the same trends that put us here in the first place and seek nationalization instead. Time will tell but as of this writing, it appears there is strong support for a push toward privatizing. Stay tuned for more information or sign-up for a free newsletter and Twitter updates to stay informed on the latest news you need to know in real estate.

See you at the top!

Chris McLaughlin
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