The Obama administration appears to finally be getting to the root of the economy's woes by attacking the ballooning foreclosures that have forced families out of their homes, which could help financial institutions better manage the toxic assets on their books.
President Obama is devising a program that would use tax dollars to subsidize mortgage payments for certain homeowners who are struggling financially, a move market participants say is a very important, meaningful first step in correcting a flagging U.S. housing market. Obama is expected to fully outline the plan on Wednesday during a speech in Arizona.
Much like other remedies offered by the Obama administration, the new program is short on specific details thus far. Still, market observers say that focusing on keeping troubled borrowers in their homes is crucial to a recovery.
"Absolutely, it's a good first step," said Paul Nolte, director of investments with Hinsdale Associates. "This is going to be a big step, because to this point they haven't really done much on the mortgage side for the homeowner. This is going to be key to keeping neighborhoods together and keeping people in their homes."
What is known is that the plan will require homeowners to undergo a reappraisal and affordability test before they become delinquent on their mortgage payments. The administration is committed to spending $50 billion on foreclosure prevention and establishing national standards for modifying home loans, overshadowing a patchwork of seemingly ineffective programs, including the Hope for Homeowners initiative.
As it stands, the homeowner assistance program and its scant details were the first government action to be welcomed by the stock market. After the news trickled out late Thursday, the major U.S. averages rallied into the close, with the
Dow Jones Industrial Average
nearly making up a 200-point loss earlier in the day.
By contrast, the indices have seen sharp selloffs following the emergence of details for the
and Treasury Secretary
Timothy Geithner's financial rescue plan
Any sort of help will certainly improve a rather gloomy picture for the U.S. housing market. A report from RealtyTrac earlier this week showed foreclosure filings in January rose 18% from a year ago to 274,399 properties. The report also showed that one in every 466 housing units received a foreclosure filing in January.
It's not all bad news, though. The RealtyTrac foreclosure number for January was down 10% from a month earlier, which is a tiny sliver of good news for the otherwise dismal U.S. housing market.
Additionally, the foreclosure plan could positively impact toxic assets on the balance sheets of financial firms in the form of mortgage-backed securities. All mortgage-backed securities are being impaired by falling residential real estate prices, which has been brought on as foreclosed homes have been introduced to a housing market already flooded with excess inventory.
"Any steps you take to stem that tide is positive for mortgage-backed securities in general," said Art Hogan, chief market analyst with Jefferies. "You can't clean up the toxic asset mess until there's a baseline valuation. The underlying asset could be positively affected by this foreclosure plan."
Hogan says that any plan that attempts to limit or curtail the number of foreclosures coming down the pipeline "should be supportive of real estate prices since you're not bringing new inventory into a saturated market. That's the derivative effect into the mortgage-backed securities marketplace," he said.
As a homeowner will have to return to the same financial institution they originally received their mortgage from, the mortgage-backed security will now be based on the lower, repriced mortgage, Hogans says.
"Already, the security is trading at the value of the underlying asset or even worse," Hogan said. "To the extent that's already being reflected in that asset class, you're not changing a whole lot. While the value of the repriced mortgage is going to be less, it's already reflected in the mark-to-market price. The impairment is already there. The benefit is much more long term."
Some financial institutions are already doing their part to assist with turning the foreclosure tide. Both
announced a three-week moratorium on
, with hopes that the Obama administration will be able to unveil a plan that they can implement quickly.
are expected to play a significant role in Obama's program.
Homebuilders haven't reacted very positively to the scant details of the plan, however, even though it would seem they would benefit from stopping foreclosed homes from hitting the market.
all lost ground.
"It might be a little early to be optimistic about housing only because we still have about 11 months of inventory out there," said Nolte.
Retailers and consumer discretionary names, Nolte and Hogan argue, could be the immediate benefactors of Obama's plan. "You can start to take a look at the next level, which would be retailers and others that would benefit from people getting their balance sheet in order," Nolte said.
"The first derivative call on this would be discretionary spending," Hogan said. "Everybody has been hiding in staple names, but you might see some movement out of staples into discretionary names. "
However, Nolte admits that the plan by itself may not cure all that's ailing the U.S. economy. "Everybody thinks this is a silver bullet, but there isn't such a thing," Nolte said. "This is a piece of the puzzle, but it's not the end. People are still in debt because mortgages are just one issue. You also have credit cards, loans and everything else. This is going to take time."