by Tim Cavanaugh
All signs point to a new flood of real estate foreclosures that no amount of government sandbagging will prevent. Sources of trouble:
-- A record 7.58 percent of U.S. homeowners with mortgages were at least 30 days late on payments in August, says Equifax, up from 7.32 percent in July. Delinquencies are not only rising from month to month, but rising at a faster pace. More than 41 percent of subprime mortgages are delinquent. (That's quite an increase from 2007, when I took heart from the fact that only 10 percent of subprime mortgages were in default. But, well, at least the glass is still more than half full, right?).
-- About 1.2 million loans out there are in limbo: The borrower is in serious default yet the bank has not started the foreclosure process. Another 1.5 million are in early stages of the foreclosure process but the bank hasn't yet taken possession of the home. Counting these and loans that are highly likely to end up in default, one analyst estimates three million to four million foreclosed homes will come on the market over the next few years. And don't believe the freshwater economists when they tell you there's no such thing as a free lunch: Some 217,000 Americans have not made a mortgage payment in one full calendar year, but their lenders have yet to begin the foreclosure process.
-- Option ARM recasts (not resets, as Calculated Risk explains) are as much of a time bomb as ever, with nearly all borrowers in this class making only minimum payments and negatively amortizing their mortgages.
-- Something called the National Consumer Law Center criticizes state mortgage-mediation schemes as well as the Obama Administration's Home Affordable Modification Program, which at last count had managed to prevent 235,247 homes from coming onto the market. However, data from the Federal Reserve and the Office of the Comptroller of the Currency indicate that even when these programs succeed, about half of all the renegotiated loans end up back in default soon afterward.
In those cases, the renegotiation has made things worse for everybody. The lender ends up with lower payments in the short term and then has to foreclose on a less-valuable property at some point in the future. The borrower gets no financial upside and (though he or she gets the use of a subsidized domicile for some period of time) is encouraged to stay in a losing situation when immediate foreclosure would have been a more merciful option. Prospective buyers get locked out as dumb lenders, deadbeat borrowers and the government all collude to keep the price of the house artificially inflated. And taxpayers have to spend $75 billion (the budget of HUD's Making Home Affordable program) for the privilege of making it all happen. The best option for all concerned would be to get the deadbeat out of the house as quickly as possible, but nobody is doing that.
Put it all together, and throw in mainstream media outlets that as recently as June were calling for mortgage haircuts specifically to allow people to keep borrowing against their houses, and you've got the mother of all perfect storms mixed with the crack cocaine of third rails on steroids. The foreclosure wave may seem all tired and 2008, but it's hotter than ever.
Update: Because commenter hmm brings up the Coming Commercial Real Estate Hyperpocalypse, which is the elephant in the room of all swords of Damocles spreading like wildfire; and also because like a golem I screwed up Jim the Realtor's title in my latest print column, I urge you to run, don't walk, to give two thumbs up to this tour of ghost malls by Jim the Realtor®.
by Tim Cavanaugh