PhillyDeals: Don't fight the Fed -- Housing market to recover

Two rounds of busy government-bond buying by the Federal Reserve have made the Fed the major financier of the government's endless borrowing, instead of foreigners, for what that's worth.

But this hasn't done much to reach the Fed's supposed goal of convincing employers to expand their businesses, or hire more people.

Can the third try by Fed chairman Ben Bernanke do better?

This latest round of "quantitative easing [is] a totally different approach," wrote bond-watcher (and past Fed skeptic) Richard X. Bove, in a report to clients of Rochdale Securities.

This time the Fed's planned purchases, more than $2 billion a day until employment rises, are focused on mortgage-backed securities. The goal is to boost the market for home loans.

"Let me shout, the Fed is buying mortgage paper to stimulate housing," wrote Bove. "This will work," he added. "Follow the dollars."


Back to the future

Until the early 1970s, the government ran mortgage-buyer Fannie Mae and pumped in cash during recessions so it could finance new construction, putting workers on the job and speeding recoveries.

That ended with President Nixon-era reforms to housing policy. The Emergency Home Finance Act of 1970 and other changes gave us privately run Fannie Mae and Freddie Mac, private mortgage insurance, and private trading of government-backed mortgage securities, which accelerated, delighting the many interests who profited from home construction.

It worked until it didn't. The foreclosure explosion, the financial market collapse of 2008-09, the tighter credit standards adopted by Congress and bank regulators, the moratoriums over the sloppy, automated loans by giant banks like JPMorgan Chase & Co. and Bank of America, the government re-acquisition of Fannie Mae, and seven years of weak housing construction have reduced the home loan industry to its pre-1970 condition, Bove argued.

"This means that it is now possible to adopt the techniques that were so successful," Bove concluded.

"This stimulus should re-awaken housing and the economy itself," he said.

Will this work? "It will lower mortgage rates. No question," said professor Shawn Howton, who heads the Dan DiLella Center for Real Estate at Villanova University.

But Howton quickly added that Americans won't rush to buy homes, because of the uncertainty with jobs and federal spending. But then they will:

"Our students are tripling and quadrupling in apartments or going back to live with their parents," Howton said. "Once they start to feel better about their job prospects, you could see demand really get strong."

It would help if the government eased the tough restrictions on fees and loan requirements, which contradict its goal of getting more people borrowing, Howton added.

"Low mortgage rates help," he said.

But low incomes and high taxes will still squeeze homebuyers, agreed Carolin Schellhorn, who teaches finance at St. Joseph's University. The Fed is doing this because there is nothing else they can try.


How much?

Since Philadelphia seems to have more lenders than borrowers these days, Beneficial Mutual Bancorp, the largest bank still based in the city, has been shopping for suburban banks to buy, wrote analyst Frank Schiraldi at Sandler O'Neill + Partners, New York.

"We expect a targeted deal to run around the $500 million asset level, and we think the most attractive deals would fill out Bucks and Chester Counties," said Schiraldi. He said there are still a half-dozen community banks that size, and a few aspirants.

But those little banks want big prices. "Seller expectations have not come down," Schiraldi said, sadly.

If he can't cut a deal, Beneficial boss Gerry Cuddy might focus on converting from the company being partly customer-owned and into a shareholder-owned corporation. That would make Beneficial itself a deal target.


Contact Joseph N. DiStefano at 215-854-5194,, and @PhillyJoeD on Twitter.