Solving the Foreclosure Crisis: Should We Use the Band-aid Principle?

The foreclosure crisis – the record-breaking glut of foreclosed homes that began in 2006-2007 – has rocked the nation’s economy and littered entire city blocks with vacant and/or abandoned homes due to delinquent home loans. These foreclosures act like a black hole on the surrounding property values of nearby properties, further contributing to financial hardship and blighting entire communities.

Now, four years after the crisis kicked off, we are still dealing with a foreclosure market that is far from fading.

News released recently revealed that approximately 31% of all home sales in the second quarter of 2011 were foreclosures or short sales. Year over year, that represents a 7% increase. Additionally, the average loan in foreclosure has been delinquent for a mind-numbing 599 days. Factor in the well-documented trend of lenders putting a screeching halt to their foreclosure processes due to nasty legal fights that still aren’t over and you have a troubling foundation for the housing market.

This leads some to ask the question: Do we invoke the “Band-aid Principle”?

Solving the Foreclosure Crisis Slowly Vs. Quickly

We all know the analogy. If you have a Band-aid on a wound, do you pull it off slowly, or do you rip it off quickly and limit the pain to just a second or two?

Each philosophy has its advocates for the foreclosure crisis. Proponents of the first approach – keeping as many foreclosures from entering the market as possible through loan modification programs like HAMP and loan programs like EHLP while creating tough, anti-foreclosure legislation – point to the sheer number of underwater homes on the market and say that any solution needs to slow the impact of so many foreclosures so the fragile market doesn’t collapse further.

Opponents of this approach disagree, stating that it is far more important to get it over with quickly by processing foreclosures as rapidly as reasonably possible and remove these unproductive and burdensome properties from bank ledgers – so that banks, in turn, can resume residential lending to qualified applicants. The faster foreclosures are sold, they argue, the faster home prices can stabilize.

Where to Go From Here

The argument over solving the foreclosure crisis is more complicated than just whether or not to rip the Band-aid off. Even if loan modification programs work – and many believe they don’t – you still have 4.1 million loans either in foreclosure or seriously delinquent that you have to resolve.

One solution is to aggressively push serious principal loan modifications that essentially “reset”, to an extent, the value of a mortgage loan by cutting the principal owed on the balance. That plan has its merits – some kind of loan modification has to occur – but there is nothing to suggest that banks will participate unless forced.

What needs to happen is to speed up foreclosure processing so that more foreclosures can be sold as fast as possible – a variation of the Band-aid principle. Home loans valued at pre-bubble values are unsustainable, and as long as they persist, home values will suffer and it will be more difficult for homeowners and lenders alike.

One immediate step we can take to speed up these processes and unclog the blocked foreclosure pipeline is to resolve the foreclosure settlement that is currently mired down in squabbling over legal immunity from further lawsuits against four of the nation’s largest banks. While making sure foreclosures are conducted properly with the correct paperwork is vital – legally and morally – we can’t go to the extreme and believe that foreclosures should never happen.

A healthy market depends on the ability to correct deficiencies, and foreclosure is one tool to do just that. The Band-aid principle may be in effect after all, at least when it comes to dealing with foreclosures that are waiting in line.

This was a guest post by John E. Miller:

Miller is a Real Estate Professional who has spent the last 10 years writing for several magazines and online publications. Miller is a regular contributor to Businessinsider.com as well as being the team leader of Content Acquisition and Analysis of new business development for Foreclosure Deals, where he also serves as a real estate agent expert.

Short Sales Raise Suspicion

Short sales are now a common part of housing market landscape, especially in areas of the country where foreclosures have hit hard, like California and Arizona. Suspicions have been raised that some of these short sales involve banks selling homes to “investors” who then immediately resell the homes to buyers for a large markup. The problem is that often the profits for the investor (who may be funded by the bank doing the selling) exceed 100%, and often these sales are made on the same day. For more on this continue reading the following article from Tim Iacono.

Given the recent trajectory of home prices and the number of mortgages that are already delinquent, the term “short sale” is one that is likely to stick around for at least another few years and it was in the news again today.

First, the Orange County Register reports on a Corelogic study showing an exceptionally high level of “suspicious” short sales in California and a disproportionate share where investment companies are involved.

In the “suspicious” transactions, a short sale is quickly followed by a resale for a substantially higher price, sometimes on the same day.

This study reveals that short sales that show another sale transaction closing on the same day account for 16 percent of all suspicious short sales in the industry,” said Tim Grace, senior vice president of Product Management and Analytics at CoreLogic. “These same-day resales are on average $50,000 greater than the lender agreed upon short sale price.”

Investment companies are involved in a “largely disproportionate amount” of suspicious short sale transactions, the report states. Investors in limited liability companies are the buyers in 2% of all short sale transactions, but in 28% of the suspicious cases.

Trying to avoid this sort of thing is just one more reason why it takes so long for short sales to get done. I recall that we had to sign a document pledging that we would live in the short sale house we bought last fall for at least six months. It’s not clear whether the “suspicious” short sale buyers are violating this agreement or if they’re not bound to it. My impression was that these were standard short-sale terms (along with the right of the bank to pull out of the deal at any time, for any reason, right up to the day of closing).

For a look back at our short sale odyssey, see this item from last October.

And it seems that Sarah Palin was involved in what might be viewed as a “suspicious” short-sale, recently purchasing this 4.4 acre Scottsdale, Arizona property for $1.7 million after it had been sold for less than half that amount as a short sale some time ago. Details are provided in this Zero Hedge story:

Let’s recall the math on Ms. Palin’s purchase: Whitmore buys the short sale from JPMorgan in March 2010 for $805,000. He then flips it just about one year later to Ms. Palin for… $1,750,000. A profit of 118%. Surely, this transaction should set off dozens of “suspicious” red flags at JP Morgan.

Ironically, Palin, who in this case is completely innocent of any wrongdoing, may have tripped the alarm switch on a trick that is being used by mortgage “investors” across the country (with who knows what sources of capital – arguably money from the likes of… JPM?), which are buying up wholesale REOs only to flip them to end buyers at up to 100% profits shortly thereafter.

Then again, it would not surprise us if it was none other than JP Morgan who provided the financing to “real estate investor” Platinum First Realty to purchase the property in the first place and to keep it off the market with a substantially above market price. At this point, it is clear that if any aspect of the housing market can be manipulated, it will be.

One look at the before-and-after images of the distressed property and the one that was recently sold would indicate that the investors did a huge amount of work on the place, not the least of which was to put a nice big pool in the backyard. Moreover, Zillow puts the home’s value at $1.2 million, meaning that Ms. Palin might have paid a bit too much, so, this deal is not nearly as “suspicious” as you might first think.

Whatever the case, we’ll likely be hearing short sale stories like these for years to come.

This blog post was republished with permission from Tim Iacono.

More Homeowners Taking Advantage Of Slow Foreclosure Process

It appears that more homeowners are taking advantage of the length of time it takes for banks to repossess a home. The "free rent" can last an average of 438 days before an eviction according to one study, while banks seem content with keeping the losses off their books. See the following post from The Mess That Greenspan Made.

Today’s must-read housing story in the New York Times by David Strietfeld shows just how quickly cultural norms are being cast aside in favor of doing what makes sense, that is, given the situation that many “homeowners” now find themselves in.

Owners Stop Paying Mortgages, and Stop Fretting

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

After that 60 Minutes segment a couple weeks ago, the appearance of more and more stories like this one are likely to make the situation snowball and, when you think about it, everyone’s probably just fine with that for the time being.

In this election year, the last thing that elected officials want to see gracing the front pages of newspapers is unemployed Americans being kicked out of their homes and, as long as the banks don’t take these properties back and try to unload them, they won’t have to realize the loss, their books continuing to reflect a value that has little semblance to reality.

This lets families get back on their feet again while getting used to the idea that they’re going to lose their house, making the whole process a bit easier when they finally get the boot. Sadly, the entire nation seems to be playing one giant game of “kick the can down the road”, what will someday be called the beginning of the lost decade.

Just like when they used to joke back in 2005 that, “if you can fog a mirror you can get a home loan”, today people are saying, “just stop paying your mortgage – you’ll get to live in your house free for at least a year”. In both cases, people weren’t really joking, though, if you look at this through any 20th century lens, it sounds like madness.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.



There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

It looks like the only ones that are really winning here are the lawyers…

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Housing Recovery May Be In Jeopardy

As the Obama administration executes its latest plan to rescue troubled homeowners who are underwater on their mortgages, the housing market is stumbling along in a weak state and a recovery appears to be in jeopardy. Home sales are falling as signs suggest that a growing number of homeowners are having trouble paying their mortgage . See the following post from The Capital Spectator.

The Fed is talking about an exit strategy these days, including selling its existing stockpile of mortgage securities, which it purchased in large quantities over the past 18 months to boost the sagging fortunes of the housing industry. It may be coincidence, but the Obama administration is reportedly rolling out a new program to address the still-high rate of foreclosure in the residential housing market.

"We would like to get back to an all-Treasury portfolio within a reasonable amount of time," Fed chairman Bernanke said yesterday in testimony in a session of the House Financial Services Committee. But not any time soon. We're unlikely to see an imminent unwinding of the central bank's massive portfolio of mortgage-backed and debt securities issued by Fannie Mae and Freddie Mac. The reason is hardly a secret. The real estate market is still weak, as suggested by the latest updates on new home sales and existing home sales.

But new purchases are reportedly set to end. "The Fed is on track to shut down a $1.25 trillion mortgage-securities-buying program at the end of this month," the AP reports.

Meantime, the housing market remains a drag on the economic recovery. Echoing the troubles in the labor market, the housing industry, while no longer contracting across the board at a steep rate, isn't yet showing clear signs of health. Recognizing the challenge, the White House is moving ahead with a fresh effort to stem the tide of foreclosure and the related financial turmoil it brings to homeowners.

The Obama administration has "recognized that the complexion of the mortgage crisis has changed," Howard Glaser, a mortgage industry analyst, writes in a note to clients, according to Reuters. "This is no longer about risky subprime loans -- its about home value declines that have made default a rational economic choice for homeowners."

It's not hard to find supporting evidence for Glaser's concern. In Massachusetts, for instance, the pace of foreclosure rose last month vs. January. Today's Boston Globe explains:

More than 2,000 Massachusetts homes went into foreclosure in February, a sign the state’s housing problems are not going away soon.

The number of foreclosure petitions, the first step in the process, increased 13.2 percent to 2,122 from January, according to data released yesterday by the Warren Group, which tracks real estate. Though the number of petitions was down 7.5 percent from the same month in 2009, the figures still point to a steady flow of homeowners who are struggling to pay their mortgages, said Timothy Warren Jr., the firm’s chief executive.

"The petitions are a leading indicator of people getting into trouble," he said. "It remains at a fairly high level."

The data for foreclosure deeds, the last step in the process when a lender takes back a property, were mixed last month. The number of deeds dropped 19.6 percent to 917 in February, compared with the January figures, but increased 10.4 percent from the same month a year before.

The number of foreclosure auctions tracked by the Warren Group more than tripled in February to 2,771, compared with the same month last year.

Recognizing that foreclosure remains a challenge, Bank of America earlier this week announced it would start forgiving a portion of mortgage loans. This isn't necessarily an act of charity—The Wall Street Journal reports that BoA is "under pressure by Massachusetts prosecutors."

In any case, no one doubts that the housing market is struggling. In fact, some economists say that the real estate recovery, such as it is, may be at risk, according to an Associated Press story published this week:

Only a few months ago, the housing market had been showing signs of strength as it recovered from the most painful downturn in decades. Much of the improvement, though, came from government programs that held down mortgage rates and provided tax breaks for buyers. Since the fall, sales have sunk. And the government support is running out.

The latest sour news came Wednesday, when the Commerce Department said sales of new homes fell last month to their lowest point on record. It was the fourth straight drop.

"While bad weather could well have suppressed the February result, it was dismal no matter how one tries to slice and dice it," wrote Joshua Shapiro, chief U.S. economist at MFR Inc.

That news followed a report a day earlier that sales of existing homes fell for the third straight month in February, to their lowest level since July.

This post has been republished from James Picerno's blog, The Capital Spectator.

Should More Homeowners Walk Away From Their Homes?

In the face of the recent multi-party default on the underlying debt for Stuyvesant Town, the concept that repaying a residential mortgage is a moral obligation is being called into question. The moral pressure to service an underwater mortgage may be contributing to the continuation of the current problems in the housing market. Sean O'Toole discusses this in the following post from Foreclosure Truth.

Last week a group of investors, including California pension funds CalPERS and CalSTERS, a Florida pension fund, and the Government of Singapore Investment Corporation, walked away from more than a billion dollar investment and a $4.4B loan on Stuyvesant Town – a 56-building 11,000-unit apartment city in Manhattan, whose value had dropped by $3.5B to below $2B.

Despite the massive loss, it was clearly a sound financial decision by these investment professionals to protect the funds under their care from further losses – put plainly, they were smart not to throw good money after bad.

Yet many continue to labor under the idea that unlike these businesses, homeowners have a moral obligation to make payments on their mortgage even when it makes no financial sense to do so.

The case I hear most often is that the homeowner has a moral obligation to “honor the contract”. This seems to me to naively set aside the simple fact that there are two parties to a contract, and that as part of the agreement between those parties the lender signed up for the very real possibility that they might end up with the property if the homeowner became unable or unwilling to pay. If this was not simply an option for the homeowner, there would be no reason for the foreclosure process to begin with… instead we’d be building debtor’s prisons.

Others, often those in homes that are rapidly declining in value, believe that homeowners have a moral obligation to make their payments as doing otherwise harms society at large by causing property values to fall. This is a flawed argument on multiple levels:

1. It assumes high property values are in societies best interest. That’s questionable for a variety of reasons, but clearly there is a stronger moral argument for affordability when it comes to home prices.

2. It assumes foreclosures cause price declines. I’d argue the opposite – price declines cause foreclosures. And in this case price declines were inevitable since prices were artificially inflated through unsustainable lending practices. Seems to me the morally correct thing to do is unravel that mistake as quickly as possible.

3. It assumes that in our consumer driven economy the greater good is better served by leaving more than 25 percent of homeowners underwater in their homes. Wouldn’t we be more likely to see economic recovery and job growth if our national mortgage debt once again represented a sustainable percentage of our national income and we returned to traditional levels of disposable income?

Setting aside morality, the decision to walk away from one’s home is still anything but easy. Most people have an emotional attachment to their home and the memories associated with it. Walking away also impacts the homeowner’s credit, the lender may have further recourse against the homeowner, and there can even be tax consequences.

Unfortunately in all the talk around the morality of foreclosure and walking away, we are losing sight of the bigger picture – finding the most effective way to return to a sustainable level of debt, a healthy housing market and a robust economy.

This post has been republished from Foreclosure Truth, a foreclosure information and analysis blog.

Federal Housing Administration Facing Trouble As Foreclosures Rise

The Federal Housing Administration may have to tap into tax payer money for the first time in its history as foreclosures on FHA loans continue to mount. Foreclosures are expected to continue to increase and housing prices may shrink as stimulus measures expire. See the following post from Expected Returns.

From the Washington Post, Rising FHA default rate foreshadows a crush of foreclosures:

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

Although the FHA's default rate has been climbing for months and eating into the agency's cash, the latest figures show that the FHA's woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA's cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses -- a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

There is little doubt in my mind that foreclosure will rise in 2010. FHA backed loans are just one of the mechanisms by which the government is artificially supporting the housing market. While government-sponsored stimulus temporarily creates an artificial boom, sooner or later the free market dictates where prices will go. Watch for asset prices to tanks as stimulus programs expire one by one.

Souring FHA-Sponsored Loans

For now, just about every major measure of the agency's financial health is worsening.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency's troubles with the 2007 and 2008 loans in October, when he told a House panel that "rogue players on the margin" immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Although lending standard for FHA-backed loans have improved recently. there is no question that the FHA has served as the "lender of last resort" for a multitude of potential homeowners. The effect of these irresponsible loans are just starting to be felt. 2010 will be the beginning of a slow grind down in housing that will be measured in years.

Projections of brighter economic conditions are based on presumptions and blind hopes of a recovery in housing that are unlikely. Remember, foreclosures aren't isolated events, as they negatively effect surrounding home prices. To put it simply, rising foreclosures and rising unemployment are not what recoveries are founded on. There is no recovery.

This post has been republished from Moses Kim's blog, Expected Returns.

Banks May Start Reducing Distressed Homeowner's Principal

The estimated 7 million foreclosures that are expected to hit in 2010 may force banks to reduce principal in a desperate attempt to keep homeowners paying their loans. Homeowners have little incentive to stay in their homes if they owe much more than their home is worth, but banks would have to declare huge losses if the masses walked away from their loans. See the following post from Expected Returns.

From Bloomberg, Principal Cuts on Lender Menus as Foreclosures Rise:

Efforts by U.S. banks to help distressed homeowners have focused mainly on temporary fixes such as interest-rate reductions that may only put off the day of reckoning, despite policy makers wanting them to do more.

Banks may be forced to resort to a remedy they’ve been trying to avoid -- principal reductions -- as another wave of foreclosures looms and payments on risky loans rise, Bloomberg BusinessWeek magazine reports in the Jan. 18 issue.

While interest-rate reductions or extending loan terms reduce homeowners’ monthly payments, they don’t give much comfort to borrowers who owe more on their homes than their properties are worth. Borrowers who don’t have equity in their homes are more likely to hand over the keys when they run into trouble. “The evidence is irrefutable,” Laurie Goodman, senior managing director of Amherst Securities Group in New York, testified before the U.S. House Financial Services Committee on Dec. 8. “Negative equity is the most important predictor of default.”

Banks are reaching maximum levels of desperation, perhaps because they know 2010 will be the year of the foreclosure. Please revisit last month's Wall Street Journal article, one in four borrowers is underwater, to get a sense of the severity of the housing crisis. As long as the labor market remains weak, housing will not recover meaningfully.

Also take a look at this article in today's Wall Street Journal, which explains that apartment vacancy rates are at 30-year highs. When rents go down, housing prices go down with it. This readjustment process in price to rent ratios will take some time to work itself through.
Extend and Pretend

The foreclosure crisis is likely to deepen this year in part because payments on many adjustable-rate mortgages are set to balloon. Unless there’s a sharp recovery in property values or a change in lenders’ willingness to cut principal, at least 7 million borrowers currently behind on their payments will lose their homes, Goodman estimates.

Some lenders may be coming around to the idea of principal reduction. “If you can right-size the mortgage and return to an equity situation, the incentive is to stay,” says Micah Green, an attorney at Patton Boggs in Washington and a lobbyist for a coalition of mortgage bond investors. Banks can either forgive principal outright or defer it. In deferrals the borrower must pay back the full amount on the original mortgage when he sells the property; if the ultimate sales price doesn’t cover the principal, the homeowner has to pay the difference, making it a less effective tool.

Our banking system has degenerated to the point where banks defer losses through the process of "extend and pretend". Primarily in the commercial real estate complex, banks are extending loan maturities in the desperate attempt to recoup their loaned money. The logic here is that by extending loans, banks can avoid massive writedowns in non-performing assets. This, of course, assumes that real estate prices will magically recover to bubble valuations. Absent a miraculous housing recovery, banks are sitting on huge losses.

The next wave down in housing will come as a surprise to most, even though the warning signs are flashing everywhere. We are in the middle of a secular downtrend in housing that will drag down our economy for years to come. I expect confidence to trough once again in 2010 as the economic recovery is proven to be an illusion. I believe this crisis in confidence will be centered around our banking system, which will be very supportive of gold prices.

This post has been republished from Moses Kim's blog, Expected Returns.

High-End Homes Contributing More To Foreclosures

Persistent economic weakness and a slow and uncertain stock market recovery are creating pressure on the higher end US residential real estate markets. With nearly 10 percent of jumbo prime mortgages in delinquency and available credit scarce, some experts believe that a second wave of the housing crash is threatening. See the following post from Expected Returns for more.

For people who have become convinced that housing has bottomed, the coming 2nd wave down will come as a surprise. The odds favor more downside when unemployment is still rising and credit is contracting. Even with mortgage rates under 5% and first time homebuyer tax credits, there is little that can be done to pump up the housing market. Now comes news that the higher end markets are coming under pressure. From Reuters, for many U.S. wealthy, housing crisis still a squeeze:

Despite some signs that the worst of the U.S. residential housing crisis may be over, many wealthy homeowners are still being squeezed by the combination of weak home prices and the stock market crash.

"I think for wealthy homeowners it will get worse before it gets better," said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate

Just wait until the stock market starts heading back down once again. A whole generation of wealthy individuals have become accustomed to high stock valuations and the fallacy that stocks always go up in the "long run". This illusion of wealth allowed Americans to consume beyond their means. After stocks go down 30-50%, and remain at those levels for a decade, expect frugality to become an entrenched mindset across the American population. This means no more housing bubbles, and housing valuations below multi-generational trendlines.

Massive Supply to Hit the Market

More unwanted supply of U.S. homes at the high end may also come from foreclosures. According to data from research firm First American CoreLogic, the rate at which wealthy homeowners are falling behind on their mortgage payments is increasing.

It says 9.4 percent of those with jumbo prime mortgages -- those over $417,000 -- are 90 days or more behind on their payments. This pales next to the 33.8 percent of subprime loans that are delinquent 90 days or more. But the rate is rising.

While the subprime delinquency rate is 1.3 times higher than a year ago, the jumbo prime delinquency rate is 2.6 times higher, suggesting that wealthy homeowners overstretched themselves financially much as their poorer counterparts did.

The point that I've been trying to make the past couple of months is that there is more pain to come in the higher end markets. Higher net worth individuals can weather any economic storm better than low income individuals, since they tend to have more savings and assets to liquidate to raise cash. But, persistent economic weakness eventually results in capitulation. Have we reached the point of capitulation for wealthy individuals? Apparently, we're getting close.

This post has been republished from Moses Kim's blog, Expected Returns.

How The Obama Home Loan Modification Program Works

Will Obama's new loan modification program make a significant impact on the housing market? If successful, millions of homeowners would be saved from foreclosure, preventing more foreclosures from flooding the banking and housing sectors. The following article from Blown Mortgage explains how the Obama Loan Modification Program will work.

The objectives of the Obama Loan Modifications program are rather ambitious, to help 7 million people (the number is also quoted as 9 million, depending who you ask) modify their loan in order to afford monthly mortgage payments. In fact the way the program is designed you can save money by modifying your loan. The government is seriously backing this program with their big guns, namely $75 billion of funding. As always with these programs there are technicalities to deal with but the gist is rather simple to understand.

The loan modification program provides incentives to banks and service providers to modify your loan to a more sustainable monthly payment if you qualify through the trial period. The three month trial period tests if you are on time with your payments.

If you are, you receive a bonus that goes towards paying the principal of your loan. After that, every year you pay your mortgage without being delinquent on any payment another bonus is paid towards your mortgage principal.

These bonuses are worth extra because they pay the actual cash you initially borrowed, on which you will not have to pay interest. Who qualifies? This is one of the prickly areas of the program. The Loan modification aid program was designed to be as open as possible. You don´t have to be behind in your payments to qualify, just struggling to meet the monthly payments with your current income.

However the issue gets a little complicated due to a clause that limits a lot of home owners that are struggling. You can only qualify if your mortgage represents more than 30% of your monthly income. If it is less you will not qualify. This clause is actually under revision due to the fact that most borrowers don´t only owe on their mortgage but on their car, their credit cards, etc… This causes some of the most desperate home owners that owe money from various lenders not to qualify for the help they need. There are two main groups that can qualify for loan modification.

Those that want a loan modification but that didn´t qualify because the value of their home dropped and those that are on the brink of foreclosure. Either of these groups can get a loan modification if they comply with the programs requirements.

This post has been republished from Blown-Mortgage, a mortgage news and analysis site.

Foreclosure Numbers Going In Wrong Direction

As long as foreclosures keep climbing, the housing market will be poisoned with bank owned properties. Now it's not just sub-prime or ARM borrowers that are defaulting but the average American with solid credit who are now driving up foreclosure numbers. See the following article from Mortgage Roadmap that discusses the worsening foreclosure epidemic.

The news on housing foreclosures isn't getting any better. In fact, it's getting worse.

According to a story in the Wall Street Journal, one in every eight U.S. households with mortgages was either in foreclosure or behind on its mortgage payments in the second quarter of this year.

The most frightening thing about these new numbers is that many of these foreclosures on on households with good credit that took out safe, conservative mortgage loans.

The national economy, of course, is the culprit here. Too many people have lost their jobs during this economic slump. And they're not able to find new ones. Suddenly, a mortgage payment that was doable during good times is an impossibility.

The bottom line, unfortunately, is that the foreclosure crisis won't ease until the nation's unemployment rate starts seriously dropping. Homes became far too expensive during the recent housing boom. This means that mortgage loans, and the monthly payments that come with them, took up a greater percentage of homeowners' monthly income.

We are now seeing the results: When the economy is sailing along, and jobs are plentiful, homeowners can make their mortgage payments. When a bump occurs, though, and jobs start disappearing? Those mortgage payments are far out of reach for too many homeowners.

This article has been republished from The Mortgage Roadmap.

1 in 10 Californians With Home Loan Are In Default

With California's default rate climbing to a staggering 9.5%, it makes you wonder how prices could rebound with the flood of foreclosures adding to the unsold inventory. Tim Iacono from The Mess That Greenspan Made, writes about a couple of prominent housing market experts that apparently don't fear the falling knife of home prices, having recently purchased property despite the scary housing climate.

I wonder if Peter Hong at the Los Angeles Times has any doubts or regrets about buying a house back in November as recounted here, a story that, surprisingly, shows up near the top in a Google search on Peter Hong buys a house.

It would be only natural to have at least a couple of weird thoughts rolling around in your head, especially when you have to write about stuff like this in order to pay your mortgage:

California's default rate soars to 9.5%
Delinquencies in June are up sharply from a year ago, when 6% of borrowers were behind on their loans.
By Peter Y. Hong

About 1 in 10 Californians with a home loan is now in default, and there's growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate -- the percentage of borrowers who have missed several payments and are in the first stage of foreclosure -- climbed in June to 9.5% in California and 9.9% in Los Angeles County, according to First American CoreLogic.

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

"It's probably a given we'll see a high number of foreclosures in the next couple of quarters due to the level of defaults plus the recession and jobs lost. There's plenty more pain to come," said Andrew LePage, an analyst for real estate research firm MDA DataQuick of San Diego.

At least he's not like the serial bankruptcy Edmund Andrews family of the New York Times...

Peter's story was actually quite interesting - about what he and his wife went through in buying a bank repo and their desire to simply have a place they can call their own after selling their condo back in 2005 and renting for a few years.

I wonder whether, if he knew then what he knows now, he'd have made the same decision.

If unemployment weren't such a pernicious problem in the entire state of California, maybe things would look a little different, but falling home prices and rising unemployment tend to feed on each other.

Foreclosures should pick up even more now that various government moratoriums and voluntary foreclosure freezes by lenders have expired.

But LePage said the rate of foreclosures may not reach the record level set last year if lenders increase loan modifications or approve more "short sales," in which homes are sold for less than their mortgage amounts.

The mortgage delinquency rate in June was up sharply from a year ago, when 6% of California mortgages were delinquent and 5.2% in Los Angeles County were in default.

Like Dean Baker, who reportedly bought a house recently so he could enjoy it before the summer ended, Peter may find that he could have bought an even better house for the same money or the same house for less if he'd just waited another year or two.

Dean Baker, the prominent Washington, D.C., housing economist who saw the bubble coming and sold his condo in 2004, recently bought a house. Baker said he thinks the market still has more room to fall, but he wanted to enjoy his backyard this summer and was willing to pay a premium if it comes to that. He said he's OK with a 5% to 10% further decline in his home value, but "if it goes down 20% I'll be upset."

With the prospect of housing price bottoms being such long and drawn out affairs, is it really that important to be able to paint a room the color you want? You can buy a lot of happiness for the probable tens of thousands of dollars that both Peter and Dean would likely have saved by waiting another year or so.

The falling knife of house prices is clearly not dropping as fast as it was a while back, but it is definitely still falling, despite what you may have read in the mainstream media this week.

This post was republished from Tim Iacono's blog, The Mess That Greenspan Made.

Foreclosures Far Outpacing Mortgage Modifications

While the Obama Administration's foreclosure prevention efforts have been mildly successful at helping hundreds of thousands of homeowners to modify their loans, this is just a fraction of the 1.8 million foreclosures in the first half of 2009 alone. Dan Rafter, from Mortgage-Roadmap, discusses why jobs are the key to stemming the tidal wave of foreclosures in the US.

Pres. Barack Obama's foreclosure-prevention program has seen some successes: Mortgage companies have offered to modify more than 406,000 existing mortgage loans, hopefully to keep homeowners from losing their residences to foreclosure. The program seems to be on track to offer loan modifications to 3 million to 4 million homeowners in the next few years.

But there's one problem with all this: The rate of housing foreclosures is far surpassing the number of loan modifications, according to a story in BusinessWeek.

The BusinessWeek story cites data showing that there have already been 1.8 million housing foreclosures in the first half of this year. That makes that 406,000-plus loan-modification figure look a bit paltry. The story also says that the country will see anywhere from 3 million to 4 million new housing foreclosures during the next two years.

It's going to take an awful lot of mortgage-loan modifications to stem this tide. Of course, the real way to stop this wave of housing foreclosures is to get people working again. With the national unemployment rate nearing 10 percent, there are just too many people out of work these days.

When you don't have a job, it's awfully hard to make those mortgage payments. That's the big issue right now. And until this changes, all the government foreclosure-prevention programs won't really make a big dent in the record number of foreclosures now hitting the country.

This post has been republished from Mortgage Roadmap, a mortgage news and analysis site.

Adjustable Rate Mortgages Storm Is Brewing

A storm of adjustable rate mortgage foreclosures could be on the horizon according to the Wall Street Journal. In April 36.9% of these loans are at least 60 days delinquent, which means a large number of foreclosures may soon strike the housing market. See the following post by Tim Iacono.

The chart below was promptly whipped up after reading this report($) in today's Wall Street Journal about just how fast Option-ARMs are souring as compared to subprime loans.



It's not so much that the default rates for Option-ARMs have exceeded that of subprimes loans for three months running, but that the absolute numbers are so high.

More than one-third of all Option-ARMs (called Pick-A-Pay loans below) are in default and most of these are likely to make it to the foreclosure stage eventually.

Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.

As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.

Payment-option mortgages are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making borrowers inordinately vulnerable to declining property values. The deepening loan turmoil could mean higher-than-expected losses for Wells Fargo & Co., J.P. Morgan Chase & Co. and the Federal Deposit Insurance Corp.'s own insurance fund.

"The realization of the issues related to option ARMs is just beginning," said Chris Marinac, director of research at Atlanta-based FIG Partners.

If memory serves, the wackiest thing about Option-ARMs a few years ago was that banks could book the interest and principal payments as income even though they weren't actually receiving the money - the vast majority of borrowers were only making the lowest payment that didn't even cover the full amount of the interest due that month.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Adjustable Rate Mortgages Could Fuel The Next Wave Of Foreclosures

The record number of foreclosures may not include a large pool of adjustable rate mortgages that are scheduled to increase in the next few years. This ticking time bomb could cause an aftershock of foreclosures hitting the market in the future, even after the current wave ends. Dan Rafter from Mortgage Roadmap explains.

I'd like to think that we've seen the worst of the foreclosure crisis. I'd like to think that we'll be seeing fewer homes fall into foreclosure, and fewer homeowners missing their mortgage payments.

I'd like to think all that. Unfortunately, I can't.

What I really think is that the number of housing foreclosures is only going to rise in the coming months. And, unfortunately, many economic analysts agree with me.

A story in the Miami Herald focuses on the plight of homeowners who during the housing boom took out option adjustable rate mortgages. In these type of loans, borrowers can decide to pay less than what their monthly balance is. The difference is simply added to borrowers' outstanding loan balances.

The big problem — other than the fact that too many borrowers have delayed paying down the principal on their mortgage loans by using these products — is that many of these option adjustable rate mortgages are set to adjust to higher interest rates between 2009 and 2012. Many homeowners won't be able to make the higher monthly mortgage payments that result. At the same time, they won't be able to refinance because they won't have paid off enough on their home loans.

Because home values have fallen drastically over the last two years, many homeowners with these mortgage products will actually owe more on their homes than what they are worth.

Some financial experts believe that the wave of foreclosures we'll see from these loans will rival or better the wave we're seeing now.

This, of course, is just more bad news for an industry that's already reeling.

This article can also be viewed at Mortgage Roadmap.

Senate Bill 61 Could Lower Debt Of Struggling Homeowners

For struggling home owners on the verge of foreclosure who are asking where their bailout is, they may get some help in changes to the Chapter 13 bankruptcy law. Senate Bill 61, if passed, could help homeowners stay in their homes. For more on this see the following post by Diana Golobay from HousingWire.

As shocking as it is, the story of the pay-option adjustable-rate mortgage (ARM) has become old news: A borrower buys a huge home worth $1m with a mortgage that seems too good to be true at little more than $2,500 per month.

After the bills start coming in, however, the borrower realizes it really was too good to be true. The bill had only prompted the minimum due, even though the total amount payable was more like $5,000. The bank conveniently loaned the borrower the remainder each month and tacked it onto the principal.

Then the monthly rate reset. The pile of debt that initially grew bit by bit now swells into a mountain.

And the borrower? Stuffed under too many helpings of debt, underwater on the home and losing any chance or hope to refinance.

Some groups, like the mortgage loan restructuring business segment of the Law Offices of Joseph R. Manning, Jr., promise relief through mortgage modification (although what can be said about the success of these efforts when the mortgages are already too deep underwater to qualify for refinance is unknown).

Sean Reynolds, the managing director of the legal office’s restructuring business, calls pay-option ARMs the next wave of defaults plaguing the luxury home market — where many of these ARMs cropped up, as the average borrower couldn’t afford them any other way. The law office is even prepared to go after lenders, brokers and servicers that violate borrowers’ rights, according to a media statement.

Without getting into what responsibility the borrowers are expected to take in the origination process, it’s understandable that home owners would attempt to do something about all that debt, regardless of whether they can actually repay it.

It’s no wonder that consumers who took out pay option ARMs, subprime mortgages and other heaping helpings of debt are finding themselves in dire straits. With already expensive mortgage payments about to explode with reset rates, some home owners might even have to pass debts from one form to another to make ends meet each month.

One such option, credit card debt, is showing signs of the strain as some home owners are forced to use credit cards for living expenses after the mortgage payment wipes out a substantial portion of monthly income.

TransUnion.com, one of the major US credit bureaus, found the average bank card borrower’s debt inched up 0.82% to $5,776 in Q109 and is up 4.09% from the year-ago quarter. Meanwhile, the bank card delinquency rate of borrowers 90+ days past due on one or more of their cards rose 1.32% in Q109 and is up 9.1% from the year-ago period.

“As the recession entered its sixth quarter, we saw continued increases in average bankcard balances, as consumers struggled to meet repayment obligations in a job market that continues to deteriorate,” says Ezra Becker, director of consulting and strategy at TransUnion’s financial services group, in a media statement today.

With the US unemployment rate now up to 9.4%, some borrowers that had relied first on refinanced mortgages and then on credit cards to get by may soon find themselves facing an unhappy alternative: foreclosure, repossession or bankruptcy.

In May alone, US consumer bankruptcy filings were up 37% from the year-ago levels, according to the American Bankruptcy Institute (ABI). The total volume of filings in the month — 124,838 — stayed roughly level with April’s volume — 125,618 — although Chapter 13 filings made up 27% of all consumer cases in May, above the April rate.

A Chapter 13 case allows the debtor to keep his or her possessions and property, and to pay creditors under a budgeted plan. And, if Senate Bill 61 eventually goes through, a Chapter 13 debtor might also qualify for his or her bankruptcy judge to forgive — or “cram down” — a portion of the home mortgage balance or otherwise modify the mortgage to ensure affordability of payments going forward, again passing the debt further away from the borrower.

“As consumers continue to face increasing levels of unemployment and rising foreclosure rates, bankruptcy filings will continue to accelerate as families seek financial relief from the tough economic climate,” said ABI executive director Samuel Gerdano in a media statement.

With the ABI predicting more than 1.4m new bankruptcies by year-end, it seems like the cycle will continue to unwind as long as the housing market stumbles along toward bottom.

This article has been reposted from HousingWire. View the article on HousingWire's mortgage finance news website here.

Are Real Estate Prices Stabilizing?

Real estate prices are still falling across the country, but for the first time in over a year the monthly declined failed to set a new record. This is leading some analysts to believe that the real estate market just might be stabilizing. This is potentially good news, but investors should remember that while prices might be stabilizing, it could still be awhile before prices stop dropping altogether. For more on this, read the following article from HousingWire.

Home prices in major metropolitan areas continued to fall in February; however, for the first time in 16 months, the annual decline did not set a new record, possibly suggesting early signs of market stabilization.

The S&P/Case-Shiller 10-City and 20-City Home Price Indices released Tuesday recorded nationwide, annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from the returns reported for January, which fell by 19.4% and 19.0%.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” says David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “All 20 metro areas recorded a monthly decline in February, but 16 of the 20 metro areas saw an improvement in their monthly returns compared to January.”

Still, the indices show an ongoing, broad-based decline in the prices of existing single family homes across the United States, with 10 of the 20 metro areas studied showing record rates of annual decline, and 15 posting declines in excess of 10%.

In terms of annual declines, the three worst performing cities as of February are once again, located in the Sunbelt, each reporting negative returns in excess of 30%. Phoenix was down 35.2%, Las Vegas declined 31.7% and San Francisco fell 31.0%. Dallas, Denver and Boston faired the best, down a significantly lesser 4.5%, 5.7% and 7.2%, respectively. Dallas also holds the distinction of being the best performer for the month, returning -0.3%, according to the report.

As of February 2009, average home prices across the United States are at levels similar to those seen in third-quarter 2003. And despite the deceleration in home price declines seen in February, from the peak in mid 2006, home prices are still down over 30%.

Standard & Poor’s Blitzer says, “we will certainly need a few more months of data before we can determine if home prices are finally turning around.”

This article can also be found on housingwire.com.

Banks Believed To Be Holding Around 600,000 Foreclosure Properties Off Market

RealtyTrac believes that banks are keeping around 600,000 foreclosure properties nationwide off the market. This number would represent a huge portion of the available housing stock, and it is believed that banks could be strategically withholding these properties in order to prevent the housing market from collapsing even further. For more on this, read the following blog post from Tim Iacono.

If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.

A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper.
With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.

If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.

Some details from the SF Gate story:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.

Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much higher than today's market would), we may all be in for a big letdown.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

The Fundamental Problem Behind The Housing Crash

To understand why we got into this housing mess, there is no need to look further than the recent findings from the "Future of Finance Initiative." It took awhile for these geniuses to figure it out, but they found that in order to avoid mass foreclosures — lenders to make sure borrowers can actually pay back the loans. Wow, just think, if they could have figured that out sooner we never would have ended up in the situation we have today. I guess we know for next time, right? Tim Iacono looks closer at the report and adds some insight in his blog post below.

There's a special 14-page report in today's Wall Street Journal presenting the findings of last week's Future of Finance Initiative, a gathering of 100 of the "brightest minds in finance" tasked with the job of charting a path forward from our precarious current position.

No, former Fed chief Alan Greenspan was not included.

Astonishingly, not once, not twice, but at least three times, the fixing of one of the most fundamental errors of the last six or seven years is prominently featured in the many recommendation sections, what would have undoubtedly stopped the global credit bubble in its tracks years ago if someone other than "crazy housing bubble bloggers" and a few rogue economists would have brought attention to it and been able to do something about it.

This recommendation appears in Principles for Change, an interview with Peter Fisher of BlackRock Inc., it is a key element of Princeton Economic Professor Alan S. Blinder's recommendations enumerated in The Future of Banking, and it is featured as number one in a list of of almost two dozen "principles for rebuilding the financial system" in a summary section (no link found).

It's pretty simple - borrowers must be able to repay loans from income.

Gussied up a little bit for the paper it looks like this:

Minimum Underwriting Standards. Bank management and bank examiners must enforce the banks' minimum underwriting standards, focused on the borrowers' ability to repay debt from income. The bank supervisors' authority must extend beyond banks to all bank agents, such as mortgage brokers.

Maybe it's just me, but, to some of us who could see this all developing back in the first half of the decade - when Fannie and Freddie first starting having problems in 2002 and 2003, then when Wall Street got involved in a big way in 2004 and 2005, and then in 2006 when everyone laughed about "all you have to do to get a home loan is to fog a mirror" - this is just about the most ridiculous example of how maybe these guys aren't all the bright after all.

What were they saying five years ago and why did it take them so long to have this epiphany?

Alan Blinder was singing the praises of the former Fed chairman up until the housing bubble had unquestionably burst, and now he's charged with charting the new course for banking?

In just about every interview that I ever did back around the time that the housing bubble was peaking and popping, I'd always say something like the following:

All anyone has to do is spend some time in a mortgage loan office and you'll quickly see that there's no way these people are going to pay this money back. When the median home price is ten times the median income, the only way that money is getting paid back is if they sell the house at a profit and that will only work so long as home prices keep going up.

What does it say about policymakers that they couldn't see this simple truth?

When the former and current Federal Reserve Chairmen - the position that was once considered to be the second most powerful in the world behind only the U.S. president - dismiss out of hand the possibility of home prices ever declining, what hope do we have that they'll not do something equally as stupid next time?

Were they all so deluded by the apparent prosperity of our late, great asset-based economy that these wizards of the financial world were unable to see something so simple, only now realizing just how huge this simple error was?

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Median Sales Price In Southern California Stops Falling

Could the real estate market bottom finally be here? A recent report shows that the median sales price in Southern California has stopped falling — at least for one month. In some places values have even started to rise again. Although it is easy to get excited about this report, Tim Iacono does offer some warning in his blog post below.

Dataquick reported February real estate sales data for Southern California earlier today and it looks as though the median price stopped declining for the first time in almost two years.

After dropping to a six-year low last month, the median price across all of Southern California held steady at just $250,000 - that still sounds like a lot of money.

You'd likely agree if you've ever seen a median home in Southern California.

As shown above, prices in all six counties are now down more than forty percent from their peak and San Berdoo looks as though it may crack the minus 60 percent threshold as soon as next month.

Median home prices going back to late 2002 are shown below - note that both San Diego and Orange County posted advances from January to February.

Since Marshall "almost all if not all of those gains are here to stay" Prentice is now retired, new DataQuick President John Walsh provides the commentary:

The market is so tilted away from normal mainstream activity that it's impossible to generalize or predict based on the atypical patterns we're seeing. That means that normal demand and supply is building up. The floodgates could open once mortgage credit starts to open up.

Well, maybe if the banks sense that things are stabilizing a bit, we'll see a flood of bank-owned properties on the market, but it's hard to imagine you really need floodgates to hold back demand right about now given the state of the local economy.

Foreclosures were said to account for 56.4 percent of all February sales, unchanged from last month, up from a 36.2 percent share a year ago.

These distressed sales have contributed to year-over-year price declines that now far exceed any of the annual gains a few years back, prices in the Inland Empire continuing to plunge while declines in other areas slow.

Pricing in my old stomping ground of Ventura County have improved dramatically over the last couple months, from an annual decline of 36 percent in December to a drop of just 27 percent in February.

In the words of inimitable groundskeeper Carl Spackler from the 1980 movie classic Caddyshack, "So we got that goin' for us, which is nice".

This post can also be viewed at themessthatgreenspanmade.blogspot.com.

Why The Government Can’t Fix The Housing Crisis

It appears the government is ready and willing to do whatever it takes to fix the housing crisis, but there is one little problem: They can’t. As part of the new stimulus package, there will likely be a $15,000 homebuyer tax credit, and not just for first-time homebuyers, but for all homebuyers purchasing a primary residence. In addition, the government will likely attempt to drive mortgage rates down to around 4.5 percent and work particularly hard to modify troubled loans to keep homeowners out of foreclosure. With these new measures in place the housing market will surely recover…right?

The answer to that question depends on your definition of recovery. Will it be enough to stop prices from falling, and possibly even help them start going up again? It’s definitely possible, but the problem won’t be fixed even if prices do turn around. Artificially inflated prices caused the housing crisis in the first place. Homeownership became an attractive option for more people than ever before through financing options that were cheap and widely available—a little too widely available, we are now discovering. ARMs, interest-only and other creative loan programs kept monthly payments low, and people could suddenly afford a more expensive house—or so it appeared. When interest rates started rising and ARMs reset, housing values stopped climbing and all hell broke loose.

So why would we believe that artificially boosting housing values will be sustainable this time? What do we think will happen when mortgage rates rise again and the tax credits expire? We won’t have to worry about ARMs resetting this time around because they are now shunned by banks for the most part, but the fundamental problem remains that housing is just too expensive compared to income. Interest rates can’t stay this low forever, and the tax credit will expire after the end of the year. Then homebuyers will only have their personal income to rely on to pay for their homes. This is how it has always been (minus government intervention), and it is how it should be. People making $50,000 a year shouldn’t be living in a $400,000 house—It’s that simple. People need to live within their means, but the government doesn’t seem to grasp this and keeps pushing measures to modify home loans. We can try to modify people’s loans all day long, but if they can’t afford their homes, then they can’t afford their homes. According to the Wall Street Journal, over 40 percent of borrowers were at least 60 days past due eight months after their loan was modified. It seems to me that these loan modifications are just delaying the inevitable and costing banks and taxpayers more money.

Before the housing crisis can truly end, housing prices must come into balance with incomes. When this happens, the problem will solve itself. When buying a home starts to make more sense than renting, people will start buying again. It isn’t that hard to figure out. Spending taxpayer money to prop up housing is not only a waste, but an unethical perpetuation of the problem. It is completely unfair to renters as well as our youth. Unfortunately, those groups represent the minority, so their voice isn’t likely to be heard. If these measures are passed, expect to pay handsomely for it and to see another bubble burst a few years from now. At least this time no one should be able to use the excuse that they didn’t see it coming.