No End To The Foreclosure Mess

The New York Times editorial board ends the silence from the traditional media on the persistent and ongoing crisis in foreclosures.

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it [...]

One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness [...]

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

It's kind of a chicken-or-the-egg phenomenon. Do we need more foreclosures to reach a bottom in prices, or is the drop in prices driving the rate of foreclosures? I think it's the latter, but regardless, as a result more people lose their houses, and the loss in home values plays havoc with personal wealth, turns decent borrowers into underwater borrowers, and through tax reassessments saps state and local governments of revenue. So regardless of your thoughts about "interference in the market," we need to stop the crisis of rising foreclosures, and there are innovative ways to do that - a new HOLC, an "own-to-rent" scenario.

Right now, nothing meaningful is being done. The plans concocted by Washington are simply not working.

She had seen the advertisements for the new government program offering relief. She had heard President Obama promise that help was on the way for homeowners like her, people who had lost jobs and could no longer make their mortgage payments.

But when Eileen Ulery called her mortgage company — Countrywide, now part of Bank of America — the bank did not offer to alter her mortgage. Rather, the bank tried to sell her a new loan with a slightly lower monthly payment while asking her to pay $13,000 toward the principal and a fresh $5,000 in fees.

Her problem was that she did not yet present a big enough problem to merit aid [...]

More than three months after the Obama administration outlined a new program aimed at rescuing millions of distressed homeowners by compensating banks that modify mortgages, Ms. Ulery’s experience illustrates the mixture of confusion, frustration and limited assistance that now reigns.

Through many months of wrangling over the fate of the financial system, with hundreds of billions of taxpayer dollars dispensed on bailouts, distressed homeowners have waited for their own rescue amid talk that it was finally on the way. Modifications of so-called subprime and Alt-A mortgages — those made to people with tarnished credit — actually fell by 11 percent in May from April, according to research by Alan M. White at Valparaiso University School of Law.

Locally, the forced modification program from Countrywide in California, thanks to a lawsuit settlement, has done more than the federal government. But California foreclosures are rising too, because the crisis has spread. Rates are recasting, particularly on Alt-A loans and option-ARM (adjustable rate mortgage) loans. More homes have slipped into negative equity over the past six months. It's terrifying.

And the housing market has already brought the economy to the brink of collapse once. How will the policymakers stop the second wave?

Alt-A Meltdown

If you aren't depressed enough by the coming collapse of social programs for Californians as the budget nightmare drags on, consider that there will soon be more need for social services and less revenue available, as we segue into the rarely-remarked upon second wave of foreclosures in the Alt-A market.

A new wave of foreclosures is building in Sonoma County, one that echoes the subprime crisis that flooded the region’s housing market with distressed properties.

The tide of troubled loans, which first struck high-risk borrowers who did not qualify for conventional mortgages, is now spreading to people with good credit who purchased more expensive homes.

This time, it involves borrowers who took out mortgages known as Alt-A loans. Like the subprime loans that began imploding in 2006, these loans offered seductively low introductory payments that enabled many borrowers to buy or refinance homes that were pricier than they could otherwise afford.

Now, those borrowers increasingly are discovering the true cost of their loans. When the introductory period ends, monthly payments can jump 50 percent or more on the typical Alt-A loan, far higher than many borrowers can afford.

There are hundreds of thousands of these loans in California just waiting to recast. In the context of Sonoma County, 18% of all housing loans are Alt-A, most of them purchased between 2004 and 2006. Two-thirds of them will see rapid jumps in their payments in the next two years.

I spoke with Asm. Ted Lieu this weekend, who didn't even want to describe these as foreclosure waves. "It feels like they never stop." He hopes that the latest government program to try and fix the foreclosure crisis, which can allow new mortgages to be issued at 96.5% of current value, will actually make an impact, but we're talking about a whole new class of borrowers getting into trouble because of these rate recasts. This of course adds to the properties on the market, bringing down prices, adding to a whole new wave of tax reassessments, and on, and on, and on.

You can almost set aside the unemployment crisis, and the feedback loop of decreased government spending leading to reduced consumer spending and more unemployment. Just this continuing housing crisis is enough to permanently disable any solutions to economic recovery.