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The Forgotten U.S. Housing Market Foreclosure Crisis

Housing-Market / US Housing Aug 10, 2010 - 03:24 AM GMT

By: Submissions


Faiz Shakir writes: The economic meltdown of 2008 grew out of a foreclosure crisis, as Wall Street banks drove lenders to make loans that were then securitized and sold around the world, in an unregulated slew of credit products. This inflated a housing bubble that, when it burst, severely damaged an already weak economy, sent millions of homeowners into foreclosure, and put millions more out of work, leading to even more foreclosures as unemployed workers began to miss mortgage payments.

Many homeowners who were able to stay in their homes now find themselves underwater -- owing more on their mortgage than their home is currently worth. But so far, the foreclosure prevention efforts undertaken by Congress and the Obama administration, while well-intentioned, have failed to produce widespread results. This not only hurts homeowners but undermines economic recovery. Proposals for a variety of more aggressive, and potentially more effective, measures have so far not been taken up, as the programs unveiled have often lagged behind the heart of the problem. According to analysts at Morgan Stanley, "Without more intervention, the housing market will continue its 'slow motion' adjustment that will continue to inhibit economic growth and drag down consumer spending." "It's certainly a weight on the economy," said Mark Zandi, chief economist at Moody's "Nothing works all that well in the economy when house prices are falling."

FORECLOSURES RISE WITH UNEMPLOYMENT: Nearly three million homeowners received at least one foreclosure filing in 2009. As of July 2010, one in seven mortgages is delinquent or in foreclosure. According to the Mortgage Bankers Association, one in 10 homeowners missed at least one mortgage payment between January and March, which is an all-time record and a 9.1 percent increase from last year. The number of homes foreclosed upon set a record for a second consecutive month in May, while banks had an inventory of approximately 1.1 million foreclosed homes as of March.

According to the latest report from Realty Trac, foreclosures rose in 75 percent of the country's metro areas during the first half of this year, and about 3.5 million homeowners have stopped paying their mortgages, but have yet to be foreclosed upon. "We're not going to see real price appreciation probably until 2013," said Realty Trac Senior Vice President Rick Sharga. "We don't see a double dip in housing but we think it's going to be a long painful recovery for the next three years." And while subprime loans drove foreclosures early in the crisis, now high unemployment is the culprit behind missed payments. "Look at a place like Salt Lake City," said Sharga. "The foreclosure rise there appears to be entirely related to the economy." At the same time, almost 25 percent of homeowners are underwater.

HAMP DISAPPOINTS: The Obama administration's signature foreclosure prevention program -- the Home Affordable Modification Program (HAMP) -- was meant to keep 3 to 4 million troubled borrowers in their homes by lowering their mortgage payments to a sustainable level. However, according to the latest data, fewer than 400,000 borrowers have received a permanent mortgage modification, while more than 500,000, 40 percent of the total, have dropped out of the program. As the Huffington Post's Shahien Nasiripour and Arthur Delaney laid out, HAMP "has fallen short of its goals -- rather than significantly and permanently reducing home foreclosures, it is only delaying them," as borrowers make lower payments for a few months but ultimately get dropped from the program. "HAMP has not put an appreciable dent in foreclosure filings," noted a report from the Special Inspector General for TARP, the program that funds HAMP. "Foreclosure filings have increased dramatically while HAMP has been in place, with permanent modifications constituting just a few drops in an ocean of foreclosure filings." HAMP's problems stem from banks' inability to process enrollments in a timely manner and a lack of incentive for banks to ensure that borrowers successfully complete the program. So far, only $250 million of the $50 billion available for HAMP has been spent.

TAKING SMALL STEPS: The Treasury Department has acknowledged that HAMP has shortcomings and has launched new measures in an attempt to deal with the realities of today's housing crisis. Last week, it announced, "As many as 50,000 struggling homeowners in five U.S. states with high unemployment may receive help from a special $600 million federal fund," called the "Hardest Hit fund," which will "help unemployed or under-employed people keep up with their mortgage payments...[and] try to assist homeowners who are facing negative equity by reducing the principal of loans that they owe." The Department of Housing and Urban Development has also announced $79 million in grants for foreclosure mitigation.

These initiatives, while aimed at the right outcomes (as only 0.1 percent of HAMP modifications actually lower loan principle), are, as Firedoglake's David Dayen noted, "not nearly enough to deal with the scale of the problem." "Maybe with several of these droplets, you can actually start to fill the ocean," he wrote. "But $79 million, while helpful to a targeted set of families, isn't going to solve this mess." Last week, the Cleveland Federal Reserve Bank released research showing that the implementation of judicial loan modification -- known as "cram down" -- is a good way to incentivize private loan modifications. Legislation giving judges the ability to modify mortgages in bankruptcy has come up for a vote in Congress multiple times, but has yet to become law.

© 2010 Copyright Faiz Shakir- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Barbara Ann Jackson
14 Aug 10, 23:28
foreclosure mills, etc


“Media headlines are abuzz with what is going down with foreclosure mills in Florida, particularly foreclosure bill baron, Attorney David J. Stern. Unscrupulous foreclosures are more criminally exploitive than what becomes reported; it is not easy to detect nor prove. Even so, appalling collection abuses have resulted in . . .” @

20 Aug 10, 05:01
Here's the solution- “Equity Warrants”.

Most of today's underwater homeowners are not sub-prime borrowers. But because of negative equity about 15 million potential homebuyers are locked-out of a housing market that desperately needs more buyers. Some are choosing default as an option, some attempt "short-sells" which is a more honorable form of default. Some just dig-in and hope for better days when their home values return to fair value.

Unfortunately as the number of bank owned properties increase, more downward pressure is forced on home values. So it may take a long time to work the red ink through the system.

So what are “Equity Warrants”.

The underwater homeowner could--without bank approval--put their home on the market and accept any qualified and reasonable offer. Of course since the homewater has negative equity there will be a loan payoff shortage that will have to be covered. Basically an Equity Warrant is an IOU where the issuer is granting the holder of the Equity Warrant, rights to the future equity in any home they own within the next 10 (or 20) years. When, the borrower's future equity equals the amount of the warrant, or the term of the Warrant expires and is called, the holder of the warrant would convert the warrant to a note secured by the home owner's real equity. If at the expiration of the Warrant, the Warrant issuer still doesn't have enough equity to settle the debt, an unsecured note could fill the gap.

This system would create millions of potential homebuyers, thereby improving our housing market and home values.

1. For the bank it's a mater of trading under collateralized mortgages for un-collateralized Equity Warrants. A major "plus" would be the elimination of a potential default which would likely cost substantially more than excepting the warrant, even if it expires worthless.

2. For the homeowner it's an escape, trading a bad situation for a potentially better situation.

3. For the housing market it's a new buyer calling a real estate agent.

4. No taxpayer dollars needed!

What could go wrong?

Obviously this is only a concept. Some refinement is needed followed by an act of congress.

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