DAILY MEMO: the economy :

What bailout means for housing market

Securing loans likely to become easier for those with good credit, tougher for those with bad

Thursday, Sept. 25, 2008 | 2 a.m.

As the roar of Wall Street’s crumbling and consolidating banks reverberates, observers can’t avoid noting a certain comparison.

“Keep it in Vegas,” New York Times columnist Thomas Friedman declared. He imagined the 158-year-old Lehman Bros. bank’s being told “thanks for playing” as its fortunes vanished when it declared bankruptcy.

John McCain said Wall Street had developed a “casino culture.”

The roulette-rich references to Las Vegas seemed apt. The city is, in some ways, ground zero in this mess. It is among the top cities in the rate of foreclosures that followed a period of predatory home loans from lenders. That left banks saddled with billions in mortgage-backed securities that failed when the housing market soured.

Now, as Congress decides whether to support the Bush administration’s plan to bail the banks out with $700 billion for their bad assets, Las Vegans might wonder what that means for our still-falling housing market.

Single-family home prices in Las Vegas are down 30 percent from last year. Two out of three homes sold here were last owned by the banks, and 25,000 units sit vacant.

Experts say the trouble potential home buyers have had getting mortgages is compounding the problem, although it is not the primary culprit in the downturn. Recently, mortgages have become even tougher to secure amid the turmoil on Wall Street, meaning fewer Nevadans have been able to buy homes even if they want them, mortgage brokers say.

“It’s getting worse and worse,” said Paul Harris, president of Residential Capital Mortgage. “There’s not a week that goes by that I don’t get multiple updates from the various investors we deal with telling us of more restrictions, more tightening of guidelines.”

That’s particularly true for “jumbo” loans — loans that exceed $417,000 — and loans for condo-hotels and for foreign nationals seeking to buy property. For those latter two groups, finding a home loan is nearly impossible, Harris said.

For potential buyers with good credit who can afford a big down payment, conditions eased somewhat a few weeks ago when the federal government announced it would take over the failing mortgage lenders Fannie Mae and Freddie Mac. That produced a brief drop in interest rates.

But even under those circumstances, terms are still much tougher. The definition of “good credit,” for example, has risen from a credit score of 650 to 720.

“There hasn’t been a healthy lending market,” said Thomas Davidoff, assistant professor in real estate at the University of California, Berkeley’s Haas School of Business.

“There’s a feedback, of course, because when Vegas does badly that makes the mortgage market even weaker.”

Economists and local housing analysts say the proposed bailout being debated in Congress would probably help create more home lending. Banks should have more money to lend if they can rid their books of bad securities. Creating a market again for mortgage-backed securities should also encourage more lending, economists say.

“This puts a floor on how low the price will be because the government stands ready to buy these,” Davidoff said. “If you’re lending money for mortgages you might think, ‘Geez, I might want to sell this thing off and I don’t know what it will be worth.’

“The government is trying to announce there will always be a mortgage-backed securities market,” Davidoff said. “That’s part of the intent.”

But experts say that even if mortgages become easier to get, it won’t guarantee that buyers will rush into a market that most analysts predict is a year from rebounding. That’s especially true given that population growth in Las Vegas has tapered off as job creation has stalled and unemployment hit its highest point in 23 years.

Discussion: 5 comments so far…

By KDR81

9/25/08 at 8:48 a.m.

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...if home prices drop further the it becomes easier for people to secure lines of credit.

The market works...if you let it.
By azsk8fan

9/25/08 at 9:19 a.m.

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The banks could help themselves out a little more by not taking eons of time to accept full price offers on some of their foreclosures - if a person has their financing secured and makes a full-price or damn near full price offer why can't the bank respond in a timely manner - no one wants to sit around for weeks to hear if the bank is accepting their offer or not - these people will just move on and look for a home for sale that's not in foreclosure. I really think it sucks that the government is always so willing to help out the big guys, the fat cats, the corporations instead of doling out the money back to the taxpayers who might need it - by that I mean if the government is gonna dole out the money then do it right.
By odeman

9/25/08 at 11:40 a.m.

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The free market got us into this mess, so how do we figure the free market will get us of it. Although we love to blame the stupid buyer of the house he couldn't afford, the reality is Wall Street sold $25 worth of derivatives for every dollar of mortgages they held. The problem is Wall Street also sold Credit Default Swaps, another derivative, as insurance against those derivatives failing. Many "investors" bought swaps without owning any of the debt betting for a market crash. If the mortgage derivatives go belly up, the banks that sold the Swaps will be on the hook for trillions of dollars. While many say we are bailing out the rich people, many rich people stand to make huge fortunes. Money is tight because the banks are hoarding their money in case it is needed to survive. A few years ago Warren Buffet called derivatives "Weapons of financial mass destruction" and how right he was.
By jfnance32

9/25/08 at 12:05 p.m.

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Did the free market get us into this mess?

Starting with Bill Clinton the Democrats have been pushing the quasi-government/private organizations of Fannie Mae and Freddie Mac to do more and more sub-prime loans so that minorities can buy houses.

It is another quasi-government/private organization called the Federal Reserve that has a heavy influcence on interest rates. For years the interest rates were very very low.

Does not some like a free-market to me.