Sequestration will affect real estate and housing markets

by Dan Krell
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Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 18, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Mortgage workout or workover?

by Dan Krell

Earlier in December, a new mortgage relief program was announced as the Bush-Paulson Mortgage Plan. The plan, although not yet approved nor agreed to by all parties involved, is intended to help those home owners who have sub-prime mortgages with interest rates that will adjust significantly higher. Proposed details, as revealed in a December 5th, 2007 Financial Times article, include a five year interest rate freeze for sub-prime adjustable rate mortgages that were dated between 2005-2007 and whose rates are to increase between 2008-2010. Lender participation will be voluntary. Additional borrower qualifications include having less than three percent equity in their home, not being more than sixty days behind on their mortgage payment, as well as demonstrating an inability to afford any mortgage increase (www.ft.com/cms/s/0/c4b23f82-a37c-11dc-b229-0000779fd2ac.html).

Many Wall Street investors have criticized any workout plan as excessive government intervention in a market that is already correcting itself. Some in the industry have described such intervention as delaying the inevitable for those in foreclosure, explaining that many home owners who can not afford a rate increase now would possibly not be able to afford a delayed (five year) rate increase. Other critics include self described “responsible“ home owners who feel they work hard to maintain their credit and pay their mortgage timely; they claim that any government intervention to help those in foreclosure sends the wrong message.

Others, including Presidential candidates, have criticized the President for not doing enough to help those home owners already in foreclosure. For example, Senator Hillary Clinton (as posted on her website HillaryClinton.com) criticized President Bush’s plan and proposed an alternative plan that includes immediate foreclosure moratoriums and across the board rate freezes. Although well intentioned, many proposed alternatives also have market and socio-economic consequences.

Unfortunately, many home owners who are facing foreclosure don’t know that a workout plan (know as a “loan modification”) may already be possible with their present lender. Of course the home owner must request it. Additionally, the proposed workout must make sense and the home owner must demonstrate a need as well as the ability to afford the modified payments. In many cases, lenders would rather work with financially troubled borrowers than foreclose; the foreclosure process is costly – for both the lender as well as the borrower.

The key to initiating a workout plan is for the home owner to communicate with their lender. Among the many reasons why home owners facing foreclosure do not communicate with their lender include lack of information of their options, misinformed of their options, and psychological stress (including apathy and feelings of hopelessness). The latter being the most prevalent because of the psycho-social complexity, which include the events that brought the home owner to their present financial problem as well as the time and effort involved in attempting to resolve any mortgage issues.

In an effort to assist home owners who are presently facing or at risk for foreclosure, Treasury Secretary Paulson and Housing Secretary Jackson created the Hope Now Alliance as a step in President Bush’s initiative to help American families keep their home. The Hope Now Alliance was created to facilitate communication between borrowers, lenders and housing counselors. For more information on loan work outs you can visit HUD.gov or HOPENOW.com.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 24, 2007. Copyright © 2007 Dan Krell.