Mark-to-Modified Market (the Home Game Version)

Housing prices remain elevated, inventory overhang is huge, cancellations are still rampant, credit is tight, and foreclosures are still rising. It is in this environment that several new plans to modify loans are starting to be enacted:

• Fannie Mae and Freddie Mac are expected to announce plans today to speed up the modification of hundreds of thousands of loans held by the housing finance giants.

• The GSEs will reduce principal or interest rates on some loans and extend the terms of others. The program is an extension of the Hope Now alliance.

• The effort will target certain loans that are past due and will aim to bring the ratio of household debt to income for these borrowers down to 38%

• Citigroup is contacting 500,000 homeowners with $20 billion in mortgages during the next six months. About 130,000 mortgage customers are expected to qualify.

• JPMorgan Chase (and their Washington Mutual acquisition) announced plans last week to cut monthly payments by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners.

Let’s play mark-to-modified market, the home version:How can we determine the total decrease in housing prices based on these mods?

These are not home sales that are going to show up in the data of Case-Shiller, OFHEO, the NAR, or the Commerce Department.

How are we going to capture these price decreases?

I have been saying that home prices are way too elevated to eliminate much of the supply problem. This is going to be a giant deflationary shift in one swift stroke of the pen.

How can this be measured?

Previously: Fixing Housing & Finance: 30/20/10 Proposal (September 2008) http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/

Sources: Fannie, Freddie Work on Mass Loan Modification Plan Details to Be Unveiled by GSEs, Officials at 2 p.m. ET DAMIAN PALETTA WSJ, NOVEMBER 11, 2008, 10:24 A.M. ET http://online.wsj.com/article/SB122641622440217445.html

Citi, Fannie, Freddie to Halt Some Foreclosures Rebecca Christie and Elizabeth Hester Bloomberg, Nov. 11 2008 http://www.bloomberg.com/apps/news?pid=20601087&sid=aXSBUxJXX72s&

See also: A Town Drowns in Debt as Home Values Plunge DAVID STREITFELD NYT, November 10, 2008 http://www.nytimes.com/2008/11/11/business/11home.html

Financial Turmoil Hurts Toll Brothers KEVIN KINGSBURY WSJ, November 11, 2008 http://online.wsj.com/article/SB122640389717316975.html

Citigroup Offers to Ease Mortgage Terms ERIC DASH NYT, November 10, 2008 http://www.nytimes.com/2008/11/11/business/11bank.html

Beazer Homes says home closings fell in 4Q http://www.businessweek.com/ap/financialnews/D94CFDR80.htm

Fannie Mae Loses $29 Billion on Write-Downs VIKAS BAJAJ and CHARLES DUHIGG NYT, November 10, 2008 http://www.nytimes.com/2008/11/11/business/economy/11fannie.html


Originally published on November 11, 2008 at The Big Picture blog and reproduced here with the author’s permission.’