MARKETTRENDS| UNDERSTANDING THE BIGGER PICTURE
REMEMBER TARP...IS IT WORKING?
TARP , the “Toxic Asset Relief Program” was an early, bold and large scale government intervention to avert the systemic failure of banks. It’s intent was topurchase “toxic assets”, (under collateralized and non-performing mortgage loans), and get them off the books of banks. Instead, TARP morphed in to aprogram using taxpayer dollars to restore bank’s capital ratios by acquiring equity stakes in undercapitalized banks. Subsequently, “Mark to market” regula-tions were relaxed, effectively lowering the standard a bank must meet to be considered compliant.While effective in stabilizing participating banks, TARP left the toxic assets on the balance sheets of at risk banks. This treated the symptom, not the dis-ease. Banks holding nonperforming loans are no longer required to price these assets at “fair market value”, unless an event occurs which diminishes theface value of the loan. Foreclosure and short sale transactions are two such events, thus requiring banks to record the actual loss. Loan modification keepsthe borrower in the home and in most cases, will allow the bank to keep the asset on their books at face value.Legislators expect TARP banks to place priority upon modifying loans rather than foreclosing. This expectation will have a limiting effect on inventory levels,support value restoration and improve the position of at risk homeowners and banks. Every dollar of home price appreciation is one less dollar of “toxic as-set.”
DEFINING YOUR STRATEGY
Real property is a commodity. Values are deter-mined by the pool of ready, willing and able buy-ers; not sellers, not REALTORS®. The greater the number of homes on the market, the morepressure buyers will impose upon prices.Real estate remains a local business. The eco-nomic challenges we face are global. Govern-ment programs intended to stimulate recovery arenot surgical. They apply the same prescription toour market as they do Detroit and Florida. Obvi-ously, we are much more prone to recovery.Consider the freefall we saw in the stock market;Index values declined over fifty percent from their high, but have now rebounded over fifty percentfrom the lows. Unless sold, the value of theseassets are today’s market value.The same principle applies to our homes. Anydepreciation or appreciation in the value of aproperty is only realized when sold. We are welloff the bottom in most regional markets andtrending is positive.We recently represented a seller that had littleinterest in trying to keep their home. When welisted the property as a short sale in April, com-parable sales suggested a value in the $130,000range; the seller owed $195,000. We obtainedand presented an offer to the bank for $135,000.To the banks credit, they offered the seller a loanmodification, fixing their payment at 31% of theseller’s income for the term of the loan; the seller declined. In July, the bank declined the shortsale because the most recent sale of the sametownhome was $195,000 . This seller has nowbeen foreclosed upon and the property is under contract with a list price of $205,000. The seller made a mistake.Sustainable economic recovery requires that realestate values improve across the country. Thefundamental cause of this recession is the declinein real property value. Government will continueto pressure lenders to modify loans rather thanforeclose. Inventories will continue to shrink.Buyer side confidence has returned and demandcontinues to swell.We will benefit exponentially from GovernmentInitiatives necessary to restore values in Detroitand Florida. If considering a purchase; do it now.If considering a sale, select your representationcarefully and evaluate every alternative beforeacting. Values will improve and staying thecourse may be the best answer. I know; a REAL-TOR® doesn’t often say that.
Obviously we have turned the corner in terms of the number of homes for sale as well as the number of homes being sold each month. The trendwill continue to create a more competitive market for buyers, further dimin-ish inventory and impose upward pressure on prices .
Declines in inventory and increased buyer activity are having a positiveimpact on values. This is good news for sellers, banks and taxpayers.Even modest gains bring some sellers back to a positive equity positionand reduce the toxicity of non-performing loans for banks.