Pat Dorsey: Hi, I'm Pat Dorsey, Director of Equity Research at Morningstar with both the stimulus package and tarp two coming out of Washington this week, a lot of the focus has been on the aid to the banking sector but both packages contain elements that may either stimulate demand in the housing market or perhaps mitigate foreclosures down the road. With me to pick through the details is Senior Analyst for our banking team Jamie Peters to make some sense out the mess, thanks for joining me Jamie.
Jamie Peters: Good morning.
Pat Dorsey: So, the first piece of this is something that may stimulate mortgage demand, right, stimulate the housing demand and this is the tax credit, they kind of get banded around earlier this week.
Jamie Peters: Yes, so it’s actually changed, originally the republicans were suggesting a $15,000.00 tax credit for anybody who basically buys a home.
Pat Dorsey: A primary residence.
Jamie Peters: A primary residence, yes, and now it has been waddled down to $8,500.00 tax credit for first time home buyers up to a certain income limit. And then it looks like, it’s going to be in both pieces so it’s probably going to pass.
Pat Dorsey: Gotcha, I mean then given that—this would probably only apply to people who are already in fairly financially good condition, do we think this is really going to do much to stimulate the housing market?
Jamie Peters: It will stimulate some of it, I mean they try to do it with something very similar to it last year with I think with a $7,500.00 tax credit but I was really a loan. You want to have to pay it back over 15 years, this is an actual credit so it’s going to have a little bit more of a stimulus situation.
Pat Dorsey: So, it maybe we have a few people off the renting fence and get them to become first time home buyers but it doesn’t seem reasonable to expect a dried stampede for the local real estate office.
Jamie Peters: Exactly.
Pat Dorsey: All right, well now then second pieces of legislation coming in, it’s taken aspect to the pieces of legislation is foreclosure mitigation, something that is called “Key people in their homes” which are you know plays very well in prairie so to speak. And one aspect of that is actually modifying a loan themselves, what are we seeing on that front?
Jamie Peters: Well, we have several different things going on right now and there are lots of different proposals out there but basically they're talking about the $50 billion that Timothy Geithner was—for modifications and foreclosure prevention and how to use it. And one of those possibilities has been that the government will take troubled assets that the banks have on their balance sheets and buy them, modify them and then sell them.
Another possibility was to work with the banks who have this trouble assets and either pay down the principle, extend the loan or even buy down the interest rate and attempt to make this homes that are no longer affordable for their people that are in them, affordable so they can stay in their homes and we have less foreclosures on the market.
Pat Dorsey: Now this would be kind of full sharing for a contract law standpoint wouldn’t it because I mean previously you're only able to modify the terms of the mortgage if somebody actually filed for bankruptcy, within the bankruptcy if I am not mistaken. And in this case we’re talking about modifying the terms of a contract by—really.
Jamie Peters: It is going to be very difficult I think because we not only have the problems that it is going to be a pain in the contract but we also have the fact that most of those mortgages are going to be held in mortgage back securities which means that the bank wont be necessarily controlling all of the decisions, this is the problem we face again and again.
Pat Dorsey: Because we don’t know who actually owns the paper. Who actually—where that ownership level actually resides so who would be say yes or no to the modification when I ain’t even sure what part of that is.
Jamie Peters: And as a result of these problems, one of the things that are in the governments mill right now working as potentially a cram down legislation that would give the judges in a bankruptcy situation the ability to modify the mortgage without having to seek the permission of the banks that work with them. They can actually force it down their throats. Now, this is going to be a very interesting situation if it actually occurs because there are a lot of ramifications associated with tripling—securities that haven’t been work out yet and of course then it means that the banks who right now are the ones to decide whether or not it’s cheaper for them to foreclose or to modify the mortgage, they won’t have that choice anymore—
Pat Dorsey: The decision is out of their hands essentially.
Jamie Peters: Exactly and it will be very difficult to suggest that this is going to be a good thing for the banks.
Pat Dorsey: And so then the second thing people are talking about on this sort of mortgage foreclosure mitigation front is that this would came out on a Wednesday, on a Thursday rather if I'm not mistaken and an actual subsidy to the mortgage payment. That if you are over a certain income level or over certain ratio of mortgage payment to income you would be able to apply for a subsidy for your mortgage payment.
Jamie Peters: It’s trying to prevent a future foreclosure is the idea, is that if your mortgage is a real burden on your monthly budget but you’ve still been able to kind of squeeze through and make these payments you could potentially apply for subsidy to bring the mortgage payment down to about 31% of your gross income which is the typical manageable rate that most underwriting standards use to apply to, so this could be a very fascinating and it would be very good for the banks especially because it means that they're going to be getting government money without having to take any losses.
Pat Dorsey: And basically and this would not save off future foreclosures and so you know but not any cost to the banks and I'm sure they’ll be thrilled about this. But at the end of day doesn’t it just sort of keep, continue to keep people at home because they really can’t afford so we just want to push the day of reckoning further and further off into the future kind of kick the can down the road?
Jamie Peters: That is a possibility but you know as income rises and hopefully this people are in fixed rate mortgage, they’re ability to be able to afford the mortgage overtime would improve and that is really what the government is depending on. They’re depending on time, really helping to fix it and that's very important because if we cant somehow fix the underlying problem with all of these crisis which is the mortgage industry and people losing their homes then we’re never really going to get any tracks on any of the other things the government is doing.
Pat Dorsey: So, this is really a good buying time, sort of assuming that wage just go up overtime, assuming that home values do at some point you know when you and I are 80 years old rise again. And then that's what will get this affordability levels back to where people can stay on those homes.
Jamie Peters: It’s time heals all wounds.
Pat Dorsey: Sounds like it’s good solution—at this point. I'm Pat Dorsey and thanks for watching.
Transcription by:
Scribe4you Transcription Services