Kitsap Real Estate Blog

Federal Reserve policymakers are worried that the recovery in the economy may lose steam going forward, according to minutes from a recent policy meeting, .  “While participants saw incoming information as broadly consistent with continued strengthening of economic activity, they also highlighted a variety of factors that would be likely to restrain the overall pace of recovery, especially in light of the waning effects of fiscal stimulus and inventory rebalancing over coming quarters,” the minutes said. Fed members apparently believed the bank’s policy of “exceptionally low rates” for “an extended period” is explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.” The central bank’s current policy does not limit the Fed from tightening or maintaining its monetary policy, they said.

Fed members previously said that the use of “extended period” referred to three or four meetings, but the new explanation suggests that the Fed’s language “could legitimately be used until just before tightening is set to start, and thus does not convey much information about the likely start date of Fed tightening,” said Barclays Capital economist Dean Maki in a research note.   However, at the meeting a number of policymakers “pointed out that the economic recovery could not be sustained over time without a substantial pickup in job creation, which they still anticipated but had not yet become evident in the data.”  Fed members also highlighted concerns about the housing market, where gains are “leveling off” despite government support such as the homebuyer tax credit, and said commercial and industrial real estate markets continue to weaken.   “The housing market is still tenuous. The last thing the Fed wants to do is torpedo any improvements,” Canally said. “The Fed does  not want to raise rates and be responsible for squashing the recovery and killing the housing market.”

What does this mean for Kitsap real estate sellers and buyers. While home mortgage rates are more directly correlated with long term treasury securities short term interest rate increases will put upward pressure on those instruments.

Bank of America (BoA) announced last week that it would begin cutting loan balances for distressed mortgage borrowers and in the process created a lottery – if you’re lucky enough to be in its portfolio and smart enough not to pay your mortgage, you win.  Specialty servicers have been around for a while, handling the worst-of-the-worst; loans at least 90 days late, and one of the tactics they have used is principle reduction.  It sometimes works well with the worst cases.  But now BoA is taking the practice mainstream, and not surprisingly more loans are going 90 days late.

Business is booming for specialty servicers these days.  Last week the Federal Deposit Insurance Corp. sold specialty servicer RoundPoint a 50% stake in a portfolio of mostly non-performing mortgage worth almost $500 million.  Unlike the bank the entity that owns a mortgage (the bank or a group of investors), mortgage servicers are the companies that handle the day-to-day administration of mortgages. They collect payments, maintain escrow accounts and confront borrowers about late payments. They also initiate the foreclosure process when borrowers default.  Dozens of specialty services have sprung up to take on these difficult jobs. They mostly deal with loans three payments or more late, which is about 5% of all mortgages, according to the Mortgage Bankers Association (MBA).   One of their main solutions is cutting the principal balance so that homeowners no longer owe more than their houses are worth.  “Our clients would rather do a principal-reduction than an interest-reduction workout,” said Gagan Sharma, CEO of BSI Financial. “Many bought the loans at discount so they’re happy to pass the savings down to consumers.”

This could have many intended and unintended consequences. More borrowers might be encouraged to default in order to negotiate for a principle write down and perhaps keep their home thus lowering the available inventory. Kitsap real estate could still be in for downward price movements.