How will President-elect Obama affect your portfolio? Keep reading our special series for the lowdown.
Even though I have long watched the housing sector, I've been shocked by the ferocity of its current crisis, along with the broader economic turmoil it's created. Its effects are now spreading across the globe in the form of credit seizures that threaten the economies of the developed and the developing worlds alike. If left untreated, they'll clearly result in further big losses for those who have placed their savings, retirement, or other funds in U.S. and overseas equities markets.
We now know that the next president of the United States is Barack Obama, who will be inaugurated in the third week of January. Clearly there's not a single more crucial issue for the new president to tackle immediately than our complicated housing apocalypse. The economies of the world will depend upon the early steps he takes, as likely will the ultimate success of his presidency. But from what we know of the president-elect, what medicines is he likely to first apply to housing's sickness?
Finding clues to the direction
As I know you are, I'm still trying to study the president-elect's prior statements in order to better understand the housing-related measures he will first propose. Happily, as a confirmed free-marketer, I'm able to endorse most of the likely steps as being beneficial to dragging housing and mortgage finance out of the ditch into which they've fallen. I'm betting that those first steps will be efforts to:
1. Stem the raging tide of home foreclosures. A movement in this direction would constitute a tourniquet for a foreclosure rate that hit 766,000 households in the September quarter. The likely first step in this effort would be a formalized program with the federal government working -- perhaps informally -- with the likes of Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM), institutions that have already committed to developing new loan terms for the most distressed homeowners.
2. Permit bankruptcy judges to alter mortgage terms. In a white paper put out by BarackObama.com, the soon to be new president noted that, while investors who own multiple homes can renegotiate their mortgages during bankruptcy, "current Chapter 13 law requires ordinary families to stick with the original terms of their home loans -- regardless of whether the loan was predatory or unfair." Watch for a quick change in this circumstance.
3. Fight mortgage fraud and inappropriate subprime loans. There almost certainly will be a new series of steps that will define mortgage fraud more accurately than heretofore has been the case, and that will provide funding to federal and state anti-fraud enforcement programs.
4. Provide a new mortgage interest tax credit. Obama has proposed a mortgage interest tax credit. According to his white paper, his proposal would "ensure that middle-class Americans get the financial assistance they need to purchase or keep their own home by creating a 10 percent universal mortgage credit …" I am, frankly, less certain of the wisdom here. Wasn't it this sort of approach -- the push to provide mortgages to the severely disadvantaged -- that helped land us in the soup in which we're currently swimming?
5. Closely control Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). These hybrid government/private sector entities clearly haven't worked. Perhaps I'm stretching here, but a few years ago, then-Senator Obama wrote a letter to the Treasury Secretary, going on record that subprime loans were dangers and should be dealt with. I'm extrapolating that message to a presumption that, as president, Obama would stand foursquare against both subprime and Alt-A mortgage lending abuses.
6. Ensure more accurate loan disclosure. I must admit that, despite having a graduate degree in economics, I've signed loan disclosure documents in the past that I didn't fully understand. I would therefore welcome a requirement that loan information be easy to understand. Obama's white paper includes a provision for new mortgage clarity.
7. Develop a "sorely needed" economic homeownership stimulus. If you think about it, the measures above deal with the needs of home buyers and borrowers. But as Bob Toll and Ara Hovnanian, the CEOs of Toll Brothers (NYSE: TOL) and Hovnanian (NYSE: HOV), respectively, noted on CNBC on Wednesday, one can make a case for attention to the demand side of housing, as the National Association of Home Builders has. Without buyers, the rate of new home sales is unlikely to ascend from its current level of just above 450,000 units a year -- down from 1.2 million units three years ago. The form that this stimulus might take is clearly open to debate, but it seems that the need is unassailable.
Finally, while I haven't seen it listed among Obama's desires -- nor has it been part of most discussions about housing -- I'd welcome stronger standards being applied to the performances of the credit rating agencies, a la McGraw-Hill's (NYSE: MHP) Standard & Poor's unit. If any group has been derelict in the creation of our mortgage-induced credit meltdown, it was the raters. Real and professional credit rating efforts could have gone a long way to prevent the quagmire into which our economy has descended.
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