Lost perhaps in the Washington discussions of a $700 billion bailout is a provision of the Housing and Economic Recovery Act of 2008 passed in July taking effect next Wednesday, which could go a long way to helping troubled borrowers and lenders. (That’s the same bill, by the way, which “rescued” Fannie Mae and Freddie Mac and gave authority to Treasury Secretary Hank Paulson to seize the two agencies -- authority he said he wouldn’t use but then did.)
In its most basic form, according to Federal Housing Commissioner Brian Montgomery, the provision allows lenders and borrowers, on a voluntary basis, to refinance an existing distressed loan into a new, FHA-insured 30-year fixed-rate mortgage. It requires though the existing first mortgage holder to agree to write-down the existing mortgage loan to 90% or less of the current appraised value of the property and to cover the borrower's initial 3% FHA mortgage insurance premium.
The borrower, according to the law, would have to share any future appreciation on the property with the Department of Housing and Urban Development.
Despite rumors to the contrary, Montgomery, on Sept. 17, assured the House Financial Services Committee the program would be in place October 1, the date stipulated in the legislation. The program will continue until Sept. 30. 2011.
Clearly, there’s an incentive for borrowers to participate. For lenders, the lure is to lock in their losses and remove some of the uncertainty over their stability, precisely the uncertainty which has contributed to credit markets seizing up.
HUD officials insist the mortgage-rewrite plan will still go forward even in the wake of plans to have the Treasury Department buy up toxic debt.
Indeed the kickoff of the plan could be one of the most significant economic developments of the week, even if it stays beneath the radar -- even in a week which ends with the much-watched and anticipated monthly jobs report.
And, the timing of the refinance plan is perfect following a week which saw both new and existing home sales plunge, along with prices, and home values drop. Though consumer sentiment, tabulated by the University of Michigan, remained higher than it had been at the end of August, it slipped a bit from the mid-month report.
Even with the drop in sales, inventories of unsold existing homes fell. The existing home sales data have been complicated by foreclosures as lenders, overwhelmed by volume, have been listing homes with Realtors, thus inflating some of the homes-for-sale numbers. At the same time though, traditional sellers have been quietly removing homes from the market as they watch prices plummet. And, the falling prices -- for both existing and new homes -- have done little to spark sales, not surprisingly. Buyers to be sure want don’t want to buy into a falling market. Who would make a major purchase if a sale was coming up?
The drop in home values continued a trend which emerged in the Federal Reserve’s Flow of Funds report showing a drop in household net worth. Economists have long espoused a wealth effect theory which holds that for every $1 increase in net worth -- assets minus liabilities -- an individual will spend anywhere from six cents to nine cents more the following year. In the what-goes-up-must-come-down school of economics, there is a negative wealth effect theory which holds that as net worth drops, so does spending. That will be tested in Monday’s report on personal income and spending. That report holds extra significance following the “final” report on second quarter Gross Domestic Product which revised downward the estimate of GDP and personal consumption spending. Personal consumption represents more than 70% of GDP so any reduction in such spending will be felt in the overall economy.
The employment report Friday looks to be another in a series of discouraging, if not downright ugly, data dumps. Month-month comparisons of both initial and continuing unemployment claims suggest no relief for the highest in five years 6.1% unemployment rate -- and perhaps some deterioration -- or for the eight straight months of job losses, which might convince skeptics to consider the economy to be in recession.
Monday, September 29Fox Business Shopping Cart (August)July actual: $76.68 UP 1.75% M-M; 8% Y-YNo August consensusPersonal Income (August)July actual: DOWN 0.7% M-MAugust consensus: UP 0.2%Personal Consumption (August)July actual: UP 0.2% M-MAugust consensus: UP 0.2%PCE Inflation (all-item)July actual: 4.5% UP 0.5% M-MNo August consensusPCE Inflation (core)July actual: 2.4% UP 0.1% M-MAugust consensus: 2.3%Kansas City Fed President Thomas Hoenig (Non-voting Member of Federal Open Market Committee) speaks on The Economy and Monetary PolicyTuesday, September 30Case Shiller House Price Index (July)10-City IndexJune actual: 180.38 DOWN 17.0% Y-YNo July consensus20-City IndexJune actual: 167.69 DOWN 15.9% Y-YJuly consensus: 166.9Chicago Purchasing Managers Index (September)August actual: 57.9 UP 7.1September consensus: 54.4Consumer Confidence Index (September)August actual: 56.9 UP 5.0September consensus: 57.8Atlanta Fed President Dennis Lockhardt (Alternate Voter at Federal Open Market Committee) speaks on the Economy and Monetary PolicyWednesday, October 1MBA Application Index (Week ended: September 26)Week Ended September 19: 591.4, DOWN 10.6%Four-week moving average: 550.6, UP 8.4%No September 26 consensusMonster Employment Advertising Index (September)August actual: 159 UP 2No September forecastChallenger Layoffs (September)August actual: 88,736 DOWN 14.1% M-MNo September consensusADP Employment Report (September / BLS Private sector)August actual: DOWN 33,000 / DOWN 101,000No September consensusConstruction Spending (August)July actual: DOWN 0.6%August consensus: DOWN 0.5%ISM Manufacturing Survey (September)August actual: 49.9 DOWN 0.1 M-MSeptember consensus: 50.0Motor Vehicle Sales (September)August actual: 13.7 million UP 1.2 millionSeptember consensus: 13.5 millionThursday, October 2Unemployment Insurance Claims (Week Ended September 27)September 20 Actual: 493,000 UP 32,000September 27 Consensus: 490,000Four-week moving average: 462,500, UP 16,000No September 27 consensusFactory Orders (August)TotalJuly actual: UP 1.3% M-MAugust consensus: DOWN 0.9%Ex-TransportationJuly actual: UP 1.0%August consensus: DOWN 1.9%St. Louis Fed President James Bullard (Non-voting member of FOMC) speaks on U.S. EconomyFriday, October 3Employment Situation (September)Change in payroll employmentAugust actual: DOWN 84,000September consensus: DOWN 85,000Unemployment RateAugust actual: 6.1% UP from 5.7% from JulySeptember consensus: 6.1%Average workweekAugust actual: 33.7 hours unchanged from JulySeptember consensus: 33.7 hoursAverage hourly earningsAugust actual: $18.14 UP 7¢, 0.4% from JulySeptember consensus: $18.19 UP 5¢, 0.3%ISM Non-Manufacturing Survey (September)August actual: 51.6 UP 2.0September consensus: 50.0Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.
Holiday Weekend Transitions Into Heavy Week of Data
