Hopeful Note on Housing

We are currently witnessing some potentially important government initiatives in the housing arena.  They include the just announced revision to the HARP program in conjunction with ongoing easing of monetary policy by the Fed.  The Fed activities, including operation “twist” and accompanying significant purchases of GSE mortgage-backed securities, should work to exert significant downward pressure on mortgage interest rates.  Indeed, Fed purchases should depress both Treasury yields as well as the spread between Treasuries and GSE mortgage-backed securities.  Fed security purchases alone can’t due to job, however, as credit is currently both cheap and tight!  It is the newly announced Obama Administration initiative to re-finance deeply underwater but current borrowers that should aid in the  extension of low-cost credit and the transmission of monetary policy.  Those borrowers were previously denied access to re-finance activity.  While such borrowers will remain at risk of strategic default (as they are currently underwater), their mortgage carrying burdens will be lightened, potentially allowing them to better handle those costs as well as engage in additional consumer spending as is supportive of the economy more generally.  Further, while investors in those mortgages will face diminished returns in the wake of that re-finance activity, prepayment of those loans may be vastly preferred to an alternative of default.  The initiative could incrementally help to stabilize some borrowers and neighborhoods, reduce the supply of foreclosed homes on the market, and enhance the efficacy of monetary policy more generally.  We could not ask for better timing as regards the mutually reinforcing nature of the Administration and Fed initiatives.  While significant challenges abound, the news of the last few days is promising as we seek to set the pre-conditions for turnaround in housing.   

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