Consumer Law

Foreclosure Crisis - Bad and Getting Worse

By Alan White

By Alan White

Foreclosures in the United States have reached their highest level since the Great Depression. One of every eleven mortgages is now in default or foreclosure. That's more than five million American homes in trouble. Just in April, May and June, 600,000 foreclosures were started, and by June 30, 1.7 million mortgages were in foreclosure. Subprime adjustable-rate mortgages are a catastrophe: new foreclosures in that category are running at nearly 30% annually. Friday's MBA press release with the 2nd quarter numbers doesn't even disclose the total inventory of subprime ARMs in foreclosure. Delinquencies and foreclosures for "prime" adjustable-rate mortgages, which include option ARMs and other alt-A products, are rapidly deteriorating.

The Mortgage Bankers Association survey does not report on completed foreclosure sales, just foreclosure starts and total foreclosures in process. Completed foreclosure numbers are available from the HOPE NOW data releases. In 2007 they estimated there were roughly 1.5 million foreclosures started and 500,000 foreclosure sales completed. (The remaining million are on payment plans, caught up, or are working their way through the foreclosure process.) In the first half of 2008 there were 450,000 completed foreclosure sales, i.e. nearly as many in six months as in all of last year.

If you think of the foreclosure crisis as a hurricane, the eye has not hit the coast yet. We are now getting the hurricane-force winds of the first bands, i.e. the appallingly-underwritten subprime ARMs that defaulted before their rate resets. The full effect of this year's resets on subprime ARMs will come in the next few months, while 2009 will feature the breakdown of the option ARMs, with their resets that typically double the monthly payment. The continuing decline in home prices, as well as the lack of available refinancing options, mean that all the loans that are now in the delinquency categories will continue their way through the foreclosure process, adding to the numbers.

The imminent nationalization of Fannie Mae and Freddie Mac (NYTimes story) while perhaps restoring some confidence in the short-run, cannot resolve the underlying debt crisis. The GSE's are being hit by both the decline in home values and the losses on subprime mortgage-backed securities they hold. Without government intervention to stop the tide of foreclosures and their attendant loss and waste, taxpayers will have to absorb continuing losses after the GSE shareholders are wiped out. As the taxpayers become the mortgage investors of last resort, it seems all the more reasonable for taxpayers to demand action to broadly restructure existing mortgages to align them with home values, instead of allowing foreclosures at 50% loss rates to continue.

A note on numbers - the MBA reports 4 million mortgages in default or foreclosure, but that number is from their survey sample which covers 80% of all mortgages (45 out of 60 million residential mortgages). I extrapolate MBA's numbers to the entire mortgage market.

Full post as published by CL&P Blog on September 06, 2008 (boomark / email).