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A “New World Order” May NOT Be Good For Real Estate Industry

by Charles Feldman on September 9, 2009 · 3 comments


real estate bailout mortgageAn article out of the McClatchy Newspapers group caught my eye today…in particular some numbers that may not bode well for a robust real estate industry recovery any time soon.

Bailout and Regulation Nation

The article, about how a new financial world order has emerged out of the wreckage of the sub-prime mortgage fueled disaster that exploded one year ago this week, explains why it may take many years to climb back even half way up that economic ladder most of us fell down from last September.

“Over the course of 2008, the nation’s five largest banks reduced their consumer loans by 79 percent, real estate loans by 66 percent and commercial loans by 19 percent,” the article says, quoting data supplied by the FDIC.

It’s that 66 percent drop in real estate loans that threatens to preempt any meaningful recovery in the real estate market.

More to the point, the article details why that is not likely to change anytime soon: the fact that, says the article, “securitization is all but dead.”

Securitization Dead in the Mortgage Business

Securitization is how banks have managed to keep dishing out all sorts of loans to consumers because they didn’t have to carry those loans on their balance sheets: they packaged them and unloaded them on investors in the form of securities.

“The basis of revivial of the system along the line of what previously existed doesn’t exist. The foundation that was supposed to be there for the revival–of the economy–got washed away,” the article quotes James K. Galbraith of the University of Texas at Austin as saying.

Even with the massive federal bailout, banks are still nearly submerged in a sea of consumer debt of all sorts and lack any motivation to open up their purses and start lending still more money.

What Does the Future Hold for Real Estate?

That, in turn, means many banks are not likely to go out of their way to modify mortgages anytime soon. They’d rather collect hefty fees for late monthly payments than whittle away at the amount of money a homeowner still owes them. And, that, in turn, is likely to fuel more foreclosures in the months ahead–which, in turn, brings down the price of homes on the market. Any recent progress made in reducing a glut of unsold homes can quickly unravel as banks withhold aid, forcing more and customers to bite the foreclosure bullet.

Photo Credit: jakerome via Flikr

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{ 3 comments… read them below or add one }

Joshua Dorkin September 9, 2009 at 10:47 am

Great analysis, Charles!


Jack Lewitz October 1, 2009 at 10:07 am

The success of any Home modifications will require lower monthly mortgage payments. Many people who want to stay in their home cannot afford the payments they have and are looking for lower mortgage payments. Unfortunately, loans being modified are not reducing these payments and therefore more people are defaulting on these modified loans. Also, there are people being offered modification programs who clearly do not qualify for this plan like those people who are unemployed. Its hard to modify a loan when you have no ability to pay? The success of any home modification plan will require the principal balance on the loan to be reduced to the “current market value”of the home. This is the only way to make the payment more affordable. Interest rate reduction and extending loan term are not enough. Finally, if the Fed really wants to help homeowners then it should guarantee the loss in the principal reductions. For example if a homeowner has a home loan worth $100,000 but the properties current market value is only $50,000 then the loan should be based on $50,000 and the Fed could guarantee the difference $50,000 loss to the bank.
.-= Jack Lewitz´s last blog ..Pending Home Sales are The Highest Level Since March 2007 =-.


john January 6, 2010 at 4:47 pm

good analysis for problem and solutions


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