WEEK OF APRIL 7, 2008--THE RECOVERY PACKAGE

The decline in March nonfarm payrolls by 80,000 and 232,000 over the past 3 months, has spurred Congress to come up with a mortgage recovery plan to help homeowners during the housing downturn. One effect of the downturn is that construction employment fell both in residential and non-residential building and contracting, and unemployment in the industry has jumped from 9 percent to 12 percent over the past year.

The latest report by Moody’s Economy.com showed an increase in mortgages at least 30 days late to 4.46 percent in the first quarter 2008 and the foreclosure rate up to 1.39 percent of total outstanding mortgages. This is not much above long term historical rates of 4 percent for delinquencies and 1 percent for foreclosures, but still is affecting millions of homeowners.

And so the House and Senate are working on rescue packages that would provide $millions for counseling as well as expanding Federal Housing Administration (FHA) mortgage programs with another $300 billion to make it easier for homeowners to refinance into FHA loans, which allow up to 97 percent loan to value on both purchase and refinances.

One controversial provision would ban rebate pricing on mortgages. That would cost borrowers at least a 1 point (percent) origination fee that some borrowers may not be able to afford. The rebate is really financing the origination fee that all lenders charge and must be disclosed in the up front Good Faith estimate. Since fixed rates are priced like bonds (higher rate means lower points, and vice-versa), a so-called ‘zero point’ loan is one where the rates are raised slightly to pay for the origination fee.

The upper chamber granted approval to a package including $100 million in funds for housing counseling, $4 billion for local communities to buy and redevelop foreclosed homes, and a provision that allows losses incurred by businesses to be applied retroactively for four years. The Senate bill also contains a $7,000 tax credit for those who buy foreclosed homes.

Other regulations are being formulated by the Treasury and Federal Reserve to bring investment banks and hedge funds under their control that had been heretofore exempted, which allowed them to buy and sell the exotic mortgage packages with basically no capital requirement. In other words, the packaging was by borrowing with Other People’s Money.

Other news was mixed, with National Association of Realtor’s pending home sales index (PHSI)higher in the West and Northeast, but down in the Midwest and South. The PHSI in the Northeast rose 3.2 percent in February but remains 25.4 percent below a year ago. In the Midwest, the index declined 3.7 percent and is 17.4 percent lower than February 2007. The index in the South fell 5.5 percent in February and is 30.3 percent below a year ago. In the West, the index rose 2.1 percent but is 6.1 percent below February 2007.

The Federal Reserve Open Market Committee (FOMC) is expected to drop their overnight fed funds rate another one-half percent to 1.75 percent at its April 29-30 meeting, which is approaching its all time low set in 2003. This would bring the Prime Rate to 4.75 percent, and more relief to consumer loans and adjustable home equity lines tied to the Prime.

Consumer right now are treading water as spending rose just 2.5 percent in February, with most coming from a $4.7 billion boost in credit card debt. Consumers’ greatest concerns are soaring food and energy prices, and it is affecting consumer confidence. Hence consumers in the latest U. of Michigan sentiment survey raised their 1-year inflation expectation from 4.3 to 4.8 percent.

One of the first signs of a recovery in real estate and the general economy will be better inflation numbers. Right now it is keeping consumer spending at bay.

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