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Recent Fed Moves Are Significant

March 28th, 2008 at 10:47 AM by Bill Zinsser, Las Vegas REALTOR

RECENT FED MOVES ARE SIGNIFICANT
 
Since the near collapse of Bear Stearns, the Fed has moved swiftly to clearly identify methods to create a “FIX” for many aspects of what’s wrong with our real estate environment, the credit markets and buyer confidence.
 
As I’ve stated before…there has been a lot of money just waiting on the sidelines afraid to invest in the real estate market, the bond market or the stock market. It is now affecting real estate worldwide.
 
Every investor that I know is looking for the bottom or a signal that the bottom has been identified and that well-thought-out solutions are in place. We just got that signal this past week.
 
The Fed is moving in the following 6 directions to deal with both the past and the future:
 
1. BROKERAGE FIRM CREDIT ISSUES
Over the past eight years, brokerage firms have created exotic loan/investment programs and have been allowed to act much like banks - but without the same high bank lending standards and requirements set by the U.S. Government bank regulators.
 
The Fed this past week has taken a bold new approach to treating investment firms much like ailing banks and has demonstrated that with a $30 billion loan to Bear Stearns through J.P. Morgan. (Sure would have enjoyed being in that meeting on Saturday night.)
The loan was made for liquidity purposes as the failure of a major ailing brokerage firm would have been just as significant, or have a greater affect on the public, as would a bank failure in these modern times of exotic finance instruments and methods.
The Fed’s unique approach, their timeliness and their ability to show flexibility should be applauded by all of us even though it comes with a price…More National Debt. BUT this time, with a payback provision and a better chance to get it back than loans made to other foreign countries in the past.
A few days after the loan commitment by the Fed, J.P. Morgan threw a new wrinkle in the deal - a purchase of Bear Stearns by J.P. Morgan for $2.00 per share - down from $171.00/share just 14 months ago.
After an uprising of Bear Sterns shareholders, the price seems to be adjusting upwards to around $10.00/share as of this writing… further securing the loan made by the Fed.
2. FANNY MAE AND FREDDIE MAC LOAN PURCHASES
It appears that a deal has been struck for the Federal Government to acquire significant questionable loans from Fanny and Freddie (two government sponsored - but independent - lending institutions).
 
These loans, or the properties securing them, will become the property of the government and will be disposed of hopefully better than the RTC (Resolution Trust Corporation) properties of the early 1990s.
 
This move both transfers the asset (good or bad) to the Fed and to HUD (Housing and Urban Development) and provides Fanny and Freddie with fresh new liquidity to loan to current and future homeowners with new, more stringent lending guidelines.
 
3. THE STIMULUS PACKAGE
 
Approved by Congress and the President and already underway, the stimulus package will send a lot of money to the public starting in mid-May of this year.
They are finding this task much more difficult than they planned at the Federal and I.R.S. level and I am sure they wish they could rethink the whole program…but it was the ONLY solution on the table at the time. (Fourth Quarter 2007)
4. INTEREST RATES
Reducing rates, (also one of the ONLY solutions at the time) has created a concern over a double-edged sword –
 
Lower rates for borrowers
Fear of inflation along with significant devaluation of the dollar abroad
Each move in interest rates has been watched closely worldwide as to its effects both in the United States and abroad.
 
Surprisingly, the dollar has held up better than most thought and is showing a significant rebound despite the assumption that we are printing a heck of a lot of new money and circulating it into the world economy like never before.
 
5. INCREASING LOAN LIMITS ON CONFORMING LOANS
Loans, backed or “Guaranteed” by the U.S. Government are called conforming loans.
 
Loan limits for conforming loans have been increased as of this past month to as high as $750,000 in some areas all tied to an index for at least one year.
 
This is a good thing for two reasons…
 
It provides capital for home loans and refinances
And it is more “in line” with current-day home pricing
This is a significant move by the Fed.
 
6. REFINANCE CAPITAL
Much needed to attack the adjusting home loans of 2008 and 2009, new conforming loans and loan limits will help stop the future increase of potential foreclosures by providing much needed refinance capital for current homeowners at more stable interest rates.
 
THE END RESULT
The world’s response, the stock market response, and the real estate industry response have all been positive.
 
The Fed has demonstrated to me that they are now looking at the whole picture - not just the individual parts. They have crafted a direct road map to solving all the issues that resulted from our out-of-control exotic lending practices of the past 6 years.
 
These recent moves will motivate other foreign markets to consider similar adjustments and scrutiny into their lending practices and lending institutions.
 
EXPECT MORE FINANCIAL INSTABILITY
You can bet there will be more shoes to drop in both the financial and real estate markets, but, for the most part, they will all fall in one of the above six areas of concern.
 
The Fed’s decision to assist brokerage firms will be the subject of talk in other institutional boardrooms around the country attempting to figure out what advantages exist for them in their periods of re-adjustment. Their response will dominate the news for months to come, as will continued write-offs.
 
BUYER CONFIDENCE
Because of slow reporting by the government and other reporting entities, we will get one or two more months of inaccurate, delayed reports on both real estate activity and buyer confidence. This will still have an effect on some of the buying public. Check out the following link describing this very thing –
 
http://www.realtor.org/RMODaily.nsf/pages/News2008032601?OpenDocument
 
Expect a report any day revising the downward turn in buyer confidence issued in the past few days by the University of Michigan. These people are so behind the curve in all directions. They should take a page out of the “American Idol” voting process.
 
We are already seeing the return of buyer confidence…first on Main Street and now on Wall Street. Open house activity is way up across the nation…new listings are experiencing activity that we have not seen in years…and offers are being presented and accepted.
 
This is the Fed SIGNAL people have been waiting for and it will lead to the “V” shaped recovery I have been predicting rather than a long drawn out “U” shaped recovery.
 
Money will again flow into industry, business, development, and real estate in a more orderly fashion over the next several months.
 
I hate to say it, but we all needed the belt tightening.
 
Ultimately, the United States will again prove itself as the leading economic engine of the future - one that has learned to deal with economic cycles in a more organized and logical manner. This time, after a significant scare!!!
 
And That’s How I See It
 
 

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