When home values started to initially decline in 2006, the cause was attributed to rapid growth in home value to the point that price levels became unsustainable. Many of the overpriced properties were funded by subprime mortgages (considered to be the highest-risk loans) and when the default rate rapidly increased, the entire real estate sector was negatively impacted. This current downward spiral in the housing market is being nourished by the side effects of the first retraction; a surplus of foreclosure inventory that has been greatly discounted to sell.
Annually, the White House's Council of Economic Advisers produces an annual Economic Report that it provides to Congress. This year's chronicle addressed the large quantity of vacant homes that have been intentionally held back. The additional stock has been called "shadow inventory" and the report stated, "overhang may lead to some additional price declines, although prices are unlikely to fall at the same rate as they did during the crisis."
The expiration of the First-Time Homebuyers credit that was part of the Troubled Asset Relief Program has also negatively impact current home values. Although Congress recently passed a brief extension of the program (September 30, 2010) to apply to give those who were already in contract in their home enough time to close, the main program expired in April 30. As a result, home sales began to decline, adding to the growing pile of housing overstock.
What has been Done for the Housing Market
One of the first acts of the Obama administration was implementing the Making Home Affordable program funded by $75 billion. The intent of the program was to reduce the high foreclosure rate sweeping the nation. According to HuffingtonPost.com the program was designed to "induce lenders, servicers and investors to modify distressed mortgages through a series of cash incentives."
However the plan was riddled with glitches from the get go and has barely made a dent in the foreclosure trend. HuffingtonPost.com has reported, "In its first year, 1.5 million people were invited to try HAMP. About 40 percent of those who tried it have been kicked out of the program; fewer than that have been given an actual shot at keeping their homes." In reality, the program has just delayed the foreclosure process for many participants.
What can be Done to Help the Housing Market?
Reuters.com just reported on a 'rumor' that Obama administration is about to force Fannie Mae and Freddie Mac to start participating in a principal reduction program for balances owned on existing mortgages. The government-controlled lenders currently hold or guarantee half of all U.S. mortgages.
If these changes are implemented it would be under the currently existing Home Affordable Refinance Program (HARP). The plan was recently extended to continue through June 30, 2011. The program was originally designed to help millions but have only assisted a small fraction of the population.
The word on the street indicates that if this move is true, it will be part of the Treasury Department meetings regarding Fannie Mae and Freddie Mac scheduled for August 17.
