I wish I could tell you. With so many variables to factor in, it’s hard to say what the results of the President’s foreclosure prevention plan, announced yesterday, will be. However, if banks do what Barack Obama hopes that they will do, prices will start to rise again. Here’s why…
Housing prices operate according to basic economic principles. With increased supply, like we have now due to foreclosures, you get a decrease in prices. This decrease will be deepened if you have a decrease in demand, i.e. due to a greater difficulty in attaining a mortgage, fewer people in an economic position to purchase a home or lack of interest from buyers who believe that prices will continue to fall.
The President’s plan is much more ambitious and specific in the incentives that it gives to banks to modify and refinance loans than the plan that was put into place last fall. Banks determine how they will act, primarily, out of concern about their bottom-line (much than out of concern about people losing their homes) and the plan offers concrete financial incentives to banks to modify those loans. There are also financial incentives to refinance the loans of homeowners who aren’t in danger of losing their homes so that their interest rate is reduced to current levels. If this plan works as it is intended, banks will foreclose on fewer home owners and the inventory of houses for sale will decrease causing prices to rise.
There are a number of things that could doom this plan. One big one is the economy, the banks are not being asked to modify the loans of home owners who have lost their jobs and who are unable to make the payments on even a modified loan. With so many lay offs, people who have lost their jobs will still be at great risk of losing their homes if they are unable to pay their mortgage. Another thing that might dash the hopes of many homeowners is the reality that, on many loans, banks have to get permission from the investors who purchased the loan before they can modify it. Over the last several years, banks have found it very difficlut to persuade investors to modify loans or agree to short sales. There’s no telling if these new financial incentives will chip away and their reserve. The plan’s refinancing incentives only apply to loans guaranteed by Freddie Mac and Fannie Mae, in higher cost areas like California where home prices have traditionally been higher than the limit that Fannie and Freddie will guarantee, many home owners may not be eligible. Also, investors aren’t eligible for loan modifications and this might weaken the affect of this plan in many areas of California. And there are many more potential pitfalls that could hinder or dilute the affects of this plan.
I like that this plan is specific and that its focus is homeowners at risk of losing their homes. It appears that banks will only get money to the extent needed to encourage them to help people keep their homes. I think that this plan has much more potential to actually turn around the crisis in neighborhoods affected by foreclosure and the devastation facing families who are losing their homes than a plan that gives banks blank checks with the hope that they will find it in their hearts to use the money to modify mortgages.
For buyers, the days of dropping prices may be numbered. However, there’s no way to predict this for sure. I guess we’ll all have to wait and see.
