The announcement confirming that the Federal Reserve ended its mortgage-backed securities purchases from Fannie Mae and Freddie Mac has turned speculation about a double-dip in housing into a major fear for both the housing market in general and lending institutions nationwide.
Though this comes as many are encouraged the economy is showing signs of improvement, the withdrawal of this emergency rescue program is sure to have a negative effect on the housing market — as the country prepares to do without the Fed purchases of mortgage bonds.
In lieu of artificial support for liquidity in the capital and housing markets, banks today need a managed exit strategy when it comes to their distressed mortgage inventories.
With more than 8 million mortgages facing foreclosure (including the surging shadow inventory) and the declining and uncertain support of Freddie Mac and Fannie Mae, banks should consider the well-capitalized private sector — those secondary market experts capable of quickly providing both a point of recovery for the distressed assets and a proactive approach to eliminating cash-flow uncertainties.
Private-sector principals provide a pivotal contribution to lenders, borrowers, markets and society — giving lenders the opportunity to redeploy distressed assets into performing assets.
With their expertise in secondary markets, private-sector principals supply a recovery point for distressed mortgage assets and create immediate liquidity for lending institutions.
This allows banks to clear distressed mortgage assets from their balance sheets, improve liquidity, reduce regulatory and investor pressures and, perhaps, most timely, redeploy capital back into their communities and reinvigorate local economies.
Experts predict that surging distressed mortgage asset inventories will continue to exert significant downward pressure on U.S. housing market valuations.
First American CoreLogic says 11.3 million — or 24% of all residential mortgage holders — have negative equity in their homes.
In light of uncertain times in the housing market, therefore, banks today need to be proactive — making tough decisions sooner rather than later when it comes to resolving the problems facing their distressed mortgage inventories and turning to the private sector to eliminate cash-flow uncertainties and return liquidity to their institutions.
The banks that make these tough decisions early on — rather than waiting for extraneous support to resolve the problem — will be in a position to continue operating in 2010, and beyond, from a stronger financial position.
Taking a proactive approach and turning to the private sector for a managed exit strategy may be a difficult decision — but it is one proven to offer today's banks a solution for creating immediate liquidity and eliminating cash-flow uncertainties.
This approach can help banks reduce overhead costs, improve their balance sheets and emerge with better underwriting policies in place as well as eliminating cash-flow uncertainties.
This will not only benefit the institution but also enable banks to play a vital role in the economic rebuilding of their communities as they put capital back into the community and put it to work directly within their regions.
