Bailout: Will It Help Restore Real Estate Consumer Confidence?

What industry pundits had been referring to as a correction in the housing market became a full-blown crisis of global proportion this past September when the closings of veteran financial institutions, combined with climbing unemployment and foreclosure rates, triggered a $700 billion government bailout-a costly tourniquet used during the triage of the American economy.
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A few short weeks later, most Americans-especially real estate professionals and consumers-are left struggling to comprehend exactly how The Emergency Economic Stabilization Act will help us. Will it keep homeowners in their homes and unfreeze the credit markets to facilitate home buying? Will it restore the real estate consumer confidence that is so desperately needed?

Time Will Tell

According to President George W. Bush, the historic bill that was signed into law on October 3, 2008, will take time to effect change-many liken it to waiting for a medicine to start reversing an illness. And, while there is no definitive plan yet that outlines exactly how the bailout bill will help (at press time), the government insists that the plan will not only buoy Wall Street but Main Street as well.

“Exercising the authorities in this bill in a responsible way will require a careful analysis and deliberation. This will be done as expeditiously as possible, but it cannot be accomplished overnight. We’ll take the time necessary to design an effective program that achieves its objectives-and does not waste taxpayer dollars,” said President Bush at a press conference held shortly after the bill was passed.

According to most economists and experts, the $700 billion financial industry bailout could make a recession shallower, and potentially even shorter, but it won’t stop the economic and housing downturns in their tracks.
NAR Chief Economist Lawrence Yun explained that the principal goal of the bill is to unclog the financial pipelines so most Americans, the primary investors in the program, can begin borrowing again.

“Knowingly or not, the 75 million homeowners and 100 million taxpayers have now become the key stakeholders on the side of housing market recovery,” says Yun.

“This bill is likely to go through a few changes, and a new administration and Congress in January will make a lot of changes that we can’t foresee right now,” says Dave Liniger, co-founder and chairman of the board of RE/MAX Int’l. “But if our legislators listen to the consumer and create legislation that is truly responsive, I think it has a very good chance of having a positive impact on our industry.”

According to Carter Murdoch, SVP, marketing and compliance executive, Realtor-Builder Mortgage Services Group, Bank of America, the bailout is just the first step, “priming the pump” to help restore overall confidence in the financial markets. “The reality is, the liquidity crunch will take a minimum of six months, possibly more than two years to shake out,” he adds.

“I liken this to a hurricane,” says Bob LeFever, former president and COO of Coldwell Banker’s Southern California division and current president and CEO of consulting firm The LeFever Group. “First comes the wall of water. Then the eye of the hurricane comes over-the eye of the hurricane is the government stepping in with a $700 billion package. Now the aftermath is coming. This mess ain’t going to get cleaned up in 72 hours.”

Letting the Government In

The terms of The Emergency Economic Stabilization Act (see plan highlights on page 128) authorize the federal government to buy billions of dollars in bad mortgages and other debt, taking the troubled loans off the books of financial firms. The bill contains broad language requiring the Treasury Department to develop a plan to “mitigate” foreclosures, and also requires federal agencies to encourage mortgage companies to modify the loans of borrowers in danger of foreclosure.

While the details of exactly how this particular part of the plan will be carried out remain undetermined, the real estate industry, and homeowners across America, remain uneasy about government’s hand in housing-but for now, can only conclude it’s a good thing.

“The government should get more involved; the rescue plan is the start of that,” says Harley Rouda, CEO & managing partner of Columbus, Ohio-based Real Living. “Mortgage terms should be reset with the original holders. However, the execution and perimeters set is critical.”

Patricia Hoferkamp, president and COO of Burgdorff ERA in Central and Northern New Jersey, believes that “the government should turn this over to those who do it best-the real estate industry. We need a system of checks and balances between the banks and the real estate industry. We need to reach out to our industry leaders, come up with a plan and then boil it back down to the local level.”

Will Confidence Return?

As Michael Levitin, 2008 chairman of the Houston Association of Realtors, says, “People are going to have to feel that the country has optimism and a solution. To get consumers back to real estate, change has to happen and there has to be a plan for that.”

According to most politicians, the bailout bill is designed to do just that-restore confidence in the country’s economy, an occurrence that would have a far-reaching impact on industries across all markets, especially real estate. But can the bill really deliver on that promise?

“Given the fact that we do have a crisis of confidence today, the passage of the bill at least starts the process at the macro level of bringing renewed stability and confidence to the market,” believes Ron Peltier, chairman and CEO of Minnesota-based HomeServices of America. “Early indicators are not suggesting that it was a knock-out blow in accomplishing that renewal of confidence in the marketplace and the economy, but as time passes in the next few weeks (at press time), we will see a calming effect and people will begin to have confidence again.”

Alex Perriello, president and CEO of the Realogy Franchise Group, concurs that real estate confidence may emerge as a byproduct of the bill. “The only thing that will help restore consumer confidence in housing right now will be rising home prices,” says Perriello. “The only way that will occur is when current inventory levels are reduced, which in turn, requires the availability of mortgage financing to qualified buyers. In that regard, the bill should be helpful, but don’t expect a miracle any time soon. This will take time.”

According to Gino Blefari, founder, president & CEO of Cupertino, California-based Intero Real Estate, consumer confidence is inextricably tied to job security-something that’s hard to come by for many Americans these days.

“People are now afraid for their jobs,” Blefari explains. “Consumers are just not confident in anything. We’ll have to wait and see how the country reacts to the bailout once things start to happen and the election is over (at press time).”

“The bailout will help restore confidence in the market, but there are some caveats,” adds Martha Hayhurst, president and CEO of Atlanta-based Harry Norman Realtors. “We still have an election (at press time) and a financial crisis on a global scale, for starters. When you add that to an already-shaken consumer, the result is home buyers sitting on the sidelines.”

Bringing the Bailout Home

According to Rei Mesa, president of Prudential Florida Realty, it is now more critical than ever for real estate professionals on the front lines dealing with consumers to be as informed as possible. “We’re looked upon by consumers as individuals who provide guidance,” says Mesa, “and, quite frankly, stay engaged. It’s now a requirement to stay informed.”

Perriello says that discussing options with clients is essential for real estate brokers and agents, especially in the face of the overwhelmingly negative media messages and confusion over the bailout.

“I suggest we talk about the here and now and not what the bailout ‘may’ mean sometime in the future,” says Perriello. “Now that the federal government controls Fannie Mae and Freddie Mac, in addition to FHA and VA, these traditional sources of mortgage funding are still readily available with expanded loan limits set earlier this year. The financial news media would lead people to believe that unless your last name is Rockefeller, you won’t be able to get a mortgage, which is factually incorrect and a gross misrepresentation of the current mortgage market.”

Liniger advises that real estate professionals “play the hand” they’ve been dealt. “I think it’s important that real estate professionals focus on being productive in this market,” he says. “Sellers either need to price their home right or consider staying off the market right now. And buyers should take advantage of the high inventory and lower prices.”

The Industry’s Role, Path Forward

While the country’s focus is on the here and now, real estate professionals need to keep an eye toward the future while digging through the situation at hand.

What can we learn, path forward? Peltier says the real estate industry of tomorrow needs to be better based in reality.

“We have to return to a period with legitimate controls on the mortgage industry,” he explains. “Mortgage markets were creatively coming up with products to fuel the appetite of the speculative investor mindset. We need to return to more normal lending standards and more normal purchase standards and requirements.”
Throughout it all, belief in the strength of the real estate industry and its leadership perseveres.
“Real estate leads us into these situations and leads us out,” says Hayhurst. “I think as good stewards of our industry, it’s our job to get people back to work. The resiliency of the American people is strong. They are just waiting for one green light and they’ll start buying homes again.” RE

-Maria Patterson, Stephanie Andre, Kayla O’Brien, John Voket

How Did We Get Here? The making of a bailout

2006
Banks and mortgage companies take bigger risks in home lending by allowing homeowners to borrow more, put little or no money down, and not provide proof of financial condition.

2007

February 7
HSBC announces that it will see larger-than-anticipated losses from rising defaults of subprime mortgages in the U.S., the first major bank to make an announcement about rising losses. While the announcement doesn’t gain much attention, subprime mortgages soon become a watch word along Wall Street and in financial news.

April 2
New Century Financial, one of the nation’s largest subprime mortgage lenders, seeks bankruptcy protection. The trouble spreads to major Wall Street firms, such as Merrill Lynch, JPMorgan Chase, Citigroup and Goldman Sachs, which had loaned the firm money.

June 22
In the biggest rescue of a hedge fund since 1998, Bear Stearns pledges up to $3.2 billion in loans to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.

August 16
Countrywide Financial-the largest mortgage lender in the U.S.-draws down $11.5 billion from its credit lines because it can’t afford to sell or borrow against the home loans it has made.

August 31
President Bush announces a plan to use the Federal Housing Administration, which insures loans for low-income borrowers, to offer government-guaranteed loans to around 80,000 homeowners in default.

September 18
For the first time in four years, the Federal Reserve cuts interest rates by 0.5 percentage points, lowering the interest rate from 5.25% to 4.75%. Over the next eight months, interest rates will fall from 5.25% to 2%.

2008

February 13
The Economic Stimulus Act is signed into law, allowing for tax rebates to be paid to low and middle income U.S. taxpayers. The bill also includes tax incentives that will be used to stimulate business investment.

March 16
Bear Stearns is sold to JPMorgan Chase for $2 a share-less than one-tenth the firm’s market price two days before.

April 30
Interest rates reach a low of 2%.

July 11
The FDIC takes over IndyMac, a California bank that had been one of the leading lenders that made home loans to people who did not provide proof of their income. IndyMac is the first major bank to shut its doors since the mortgage crisis began.

September 7
The Bush administration takes control of Fannie Mae and Freddie Mac in an attempt to shrink their outsized influence on Wall Street and Capitol Hill, while at the same time, counting on them to pull the nation out of the worst housing crisis in decades.

September 14
Merrill Lynch is sold to Bank of America for roughly $50 billion to avert a deepening financial crisis.

September 15
Lehman Brothers files for bankruptcy protection after it fails to find a buyer. This is the largest bankruptcy filing in U.S. history.

The Dow Jones industrial average falls 504 points, the index’s worst loss since the 2001 terrorist attacks.

September 16
The Federal Reserve agrees to an $85 billion emergency loan to rescue American International Group (AIG).

September 18
The Treasury and Federal Reserve began discussions on what may be the biggest financial bailout in U.S. history. Reports of the discussion send stocks soaring, with the Dow rising 410 points.

September 20
The Bush administration formally proposes a bailout plan that would allow the government to buy bad mortgages and other forms of toxic debt that have been weighing down U.S. financial companies at a cost of up to $700 billion.

September 21
The Federal Reserve announces that Goldman Sachs and Morgan Stanley would transform into bank-holding companies that would be subject to greater regulation.

September 25
Congressional negotiations on the bailout breakdown. Conservative House Republicans say that the plan would be too costly for taxpayers as well as an unacceptable federal intrusion into private business.

September 26
Washington Mutual becomes the largest thrift failure with $307 billion in assets. JPMorgan agrees to pay $1.9 billion for the banking operations, but doesn’t take ownership of the holding company.

September 28
House Speaker Nancy Pelosi and Treasury Secretary Henry M. Paulson Jr. announce a tentative deal on a bailout plan.

September 29
The Emergency Economic Stabilization Act that has been proposed is defeated 228-205 in the U.S. House of Representatives. The Dow Jones industrial reacts by plunging 778 points.

Wachovia’s banking operations are sold to Citigroup.

October 1
The Senate passes a revised bailout plan. The new package contains $110 billion in tax breaks for businesses and the middle class, plus a provision to raise the cap on federal deposit insurance from $100,000 to $250,000. This puts pressure on the House to reverse course and approve a new plan after rejecting a similar proposal.

October 3
After two weeks of debate, the House gives final Congressional approval to the revised
$700 billion bailout plan. The historic plan is signed into law by President Bush less than an hour after being approved by the House of Representatives.

Wells Fargo agrees to buy Wachovia, stunning Citigroup, which had agreed to buy Wachovia four days earlier.

October 6
The Dow falls as much as 800 points before a late recovery, finishing down 369.88-and below 10,000 points for the first time since 2004.

October 8
Acting in coordination with other central banks around the world, the Federal Reserve cuts interest rates by 0.5 percentage points to 1.5% as the financial crisis deepens.

The Federal Reserve agrees to provide insurance giant American International Group (AIG) with an additional loan of up to $37.8 billion, on top of the $85 billion loan made to the troubled company one month earlier.

October 9
The Bush administration takes part ownership in certain U.S. banks as an option for dealing with the credit crisis. The $700 billion bailout passed by Congress allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

As investor confidence falls further, the Dow Jones falls 679 points, closing below 9,000 for the first time since the summer of 2003.

Citigroup walks away from deal to purchase Wachovia.

October 13
The Federal Reserve approves Wells Fargo’s $11.7 billion acquisition of Wachovia.

-Paige Tepping

Headed Toward Housing

Using authority granted in the $700 billion bailout plan, at press time, the Treasury Department began moving on five fronts:

- Purchasing troubled mortgage-backed securities
- Buying mortgages, particularly from regional banks
- Insuring mortgage-backed securities and mortgages, ensuring banks and investors don’t lose money if borrowers default
- Purchasing equity in a broad array of financial institutions
- Helping delinquent borrowers stay in their homes

Making Sense of The Bailout Bill

At nearly 500 pages, The Emergency Economic Stabilization Act is difficult for most Americans to comprehend. While the bill stands to morph as the new administration settles in, here are some of the highlights of the financial rescue portion of the bill as passed in its original format:

-Provide the government an equity stake, through non-voting or preferred stock, in companies that are unloading bad assets. If these companies go bankrupt, these warrants convert to a type of debt that places the government at the head of the list of creditors in any bankruptcy proceeding.
-Give the Treasury Secretary broad discretion to buy virtually any distressed asset in an effort to get it off the books of a troubled bank or financial firm and help unclog the credit markets. This is called the Troubled Assets Relief Program, or TARP.
-Provide $250 billion immediately to purchase mortgage-backed securities and other troubled assets, another
$100 billion with the president’s authorization and the remaining $350 billion would be subject to separate congressional approval.
-Give the Federal Deposit Insurance Corp. the ability to borrow without limit from the Treasury to help stabilize banks it regulates.
-Allow the FDIC to raise deposit insurance to $250,000 from the current $100,000. This affects the sum of deposits, not each account, in a depositor’s name at any given bank.
-Require the comptroller general to monitor and evaluate TARP’s performance, whether it is helping to prevent foreclosures, or providing stability in financial markets and protecting taxpayers. The Government Accountability Office (GAO) will have the authority to order corrections in the TARP effort.
-Order the comptroller general, the nation’s chief auditor, to report back to Congress by June 2009 on whether the government should curtail the ability of banks and others to invest with borrowed money.
-Create a special inspector general for the TARP program to supervise and audit the purchase of distressed mortgages and other bad assets.
-Raise the nation’s debt ceiling to $11.3 trillion.
-Reaffirm that the Securities and Exchange Commission (SEC) has the authority to suspend an accounting rule that some critics think has exaggerated the deflated prices of the toxic mortgage bonds at the heart of the financial crisis. This also is called fair-value reporting, and it was implemented after the Enron scandal to discourage reporting of inflated prices.
-Limit tax write-offs for executive compensation above $500,000 for companies that sell distressed assets to the government.
-Prohibit “golden parachutes” for executives of firms that are selling assets directly to the government.
-Kevin G. Hall