Financial storm centers on housing

WASHINGTON -- With the Bush Administration working around the clock with congressional leaders on the enactment of emergency legislation to implement a rescue plan to extricate the U.S. financial system from its worst crisis since the Great Depression, the NAHB Senior Officers and staff are remaining in close touch with policymakers in Washington.

At the fall meeting this week of the association’s board of directors in San Diego, addressing the turmoil in the financial markets, which reached grave proportions with the bankruptcy of Lehman Brothers on Sept. 15 and the bailout of insurance giant AIG on the following day, is expected to be the overriding concern.

Restoring the nation’s housing market to full health from one of the most difficult cyclical downturns in living memory was already at the top of the agenda as the association prepared to deliberate in California. With the dramatic succession of events over the past several weeks — including the federal takeover of Fannie Mae and Freddie Mac — restoring the housing finance system itself will be a leading topic of discussion among the directors.

Noting that the outcome of negotiations in Washington this week holds profound consequences for the American economy, NAHB President Sandy Dunn promised to lend the association’s expertise wherever it is needed in the difficult period that lies ahead.

In a Sept. 19 statement, NAHB Executive Vice President and CEO Jerry Howard urged the U.S. government to get out in front of the collapse in confidence that has afflicted the financial markets by addressing its origins in the housing industry.

Going to the Root Causes

“Policymakers realize the root causes — falling home prices, mounting foreclosures and a frozen credit market — must be addressed now,” Howard said.

“The plan being developed must get to the heart of the problem to successfully stabilize mortgage markets and home prices and restore confidence in global financial markets,” he said. “Ensuring that credit-worthy home buyers, builders and other small businesses have access to credit is absolutely essential to putting this economy back on track.”

On Friday, Sept. 19, Dunn informed the NAHB Executive Board that Treasury Secretary Henry Paulson, in consultation with the Federal Reserve and the Securities and Exchange Commission, was meeting on Capitol Hill to present a “troubled asset relief program” in which the federal government would purchase problem mortgage loans from current holders through an operation similar to the Homeowners Loan Corporation that was established for a similar purpose in the 1930s.

“The purchased loans ultimately would be re-sold by the government with the intent of minimizing costs to the tax payers,” she said. “Some are labeling the plan an RTC-like operation, but the key difference in the current proposal is that the assets will be purchased from ongoing institutions. RTC disposed of assets from failed or restructured institutions."

Comments from Sec. Paulson “revealed a dramatic shift in focus in the Administration’s approach to addressing the financial system turmoil,” said Dunn. “First, he stated the need to move from a case-by-case approach to more comprehensive action. Second, his statement contained strong language on the need to address the root cause of the problem — illiquid mortgage assets — rather than simply continuing to prop up troubled institutions.”

“As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy,” she quoted Paulson. “What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible home owners.”

The secretary, Dunn said, “went on to note that ‘these troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them.’”

Fannie Mae and Freddie Mac Under New Control

While it is far too early to tell how the larger economic events now unfolding will impact housing, there have been promising signs in recent weeks that home sales are near, or have reached, bottom, setting the stage for an eventual recovery in production next year (See “Eye on the Economy” by NAHB Chief Economist David Seiders in this issue.)

In the two weeks since Sec. Paulson announced on Sept. 7 that he was handing control over Fannie and Freddie to the Federal Housing Finance Agency, mortgage interest rates have been moving down significantly.

For the week ending on Thursday, Sept. 18, Freddie Mac’s Primary Mortgage Market Survey showed 30-year fixed-rate mortgages averaging 5.78%, down from 5.93% the previous week and 6.34% a year earlier. This brought the rate to its lowest level since mid-February, when it averaged 5.72%.

Mortgage rates have been declining for five straight weeks and have fallen about three-quarters of a percentage point, although the effects of the decline so far have been most pronounced in applications for refinancings, which surged 122% since Aug. 15, according to the Mortgage Bankers Association.

Builders have received further reason for optimism about the financial markets through recent assurances that the federal government is working to strengthen Fannie and Freddie.

Dunn noted that Sec. Paulson announced some immediate steps to improve mortgage and financial market conditions by having the two mortgage giants increase their purchases of mortgage-backed securities as part of their ongoing mission to support mortgage market liquidity.

“In addition, to further boost mortgage market liquidity, the secretary said Treasury will expand its recently announced program to purchase mortgage-backed securities backed by Fannie Mae and Freddie Mac,” said Dunn. “Reports are that this will involve a doubling of the program from $5 to $10 billion.”

Top association economist Seiders said that he has been pleased with how the Bush Administration has dealt with Fannie Mae and Freddie Mac, and he predicted this would promote market stability and help the housing markets recover.

However, Seiders said that policymakers should be doing more to promote the home buyer tax credit and foreclosure relief provisions in the recently enacted landmark housing bill as a means to shore up consumer confidence in the housing market.

NAHB builder members have been directing their customers to comprehensive information on the tax credit through the association’s special Web site — (Click here to see a related story in this week’s issue of NBN.)

Addressing the Housing Credit Crunch

The long-term implications of the federal government’s control of Fannie and Freddie and the role of these institutions under a new Administration and with a new Congress is being reviewed by the NAHB Housing Finance Task Force, which held its first meeting in Chicago last week.

Moving forward, the task force has been charged with developing a series of policy recommendations on how best to restore the vitality of the nation’s housing finance system.

Home builders have not only had to grapple with the emergence of a more conservative lending environment for their prospective customers, but over the past year they have had to deal with an escalating crunch in the availability of credit for sound residential construction projects, many of which are ongoing and have been jeopardized by the retreat of established lenders.

On an ongoing basis, NAHB has been surveying its membership to compile information on the full extent of the AD&C credit crisis and it has been advising decision makers in Washington of the urgent need to address this component of the housing credit crisis, which has the potential to delay the industry recovery that is expected to materialize in 2009.