In our last post, we discussed that, though the modification process has helped hundreds of thousands families keep their homes, there still will be millions of people who will still be faced with foreclosure. There is no avoiding this. And even though the administration is trying to get banks to be more flexible, the fact is you can’t modify a loan for an unemployed homeowner.
Herbert Allison, the US Treasury’s assistant secretary for financial stability, put it bluntly:
“The Treasury expects ‘millions of foreclosures’ even if the Home Affordable Modification Program (the administration’s current modification program) is a total success.”
When homeowners can’t bring the payments up to date and are not granted a modification, only two alternatives remain:
The house goes to foreclosure.
The bank agrees to a ‘short sale’ where the bank agrees to accept a selling price which is less than the amount currently owed on the mortgage.
Today, let’s look at foreclosures in this country.
There has been some reporting on the fact that the wave of foreclosures has ebbed. Part of the reason for these reports was that banks were holding back from foreclosing on houses until they gave homeowners the chance to qualify for a modification. As we reported yesterday, that didn’t happen for over two million homeowners.
Below are two graphs created with data from the Federal Housing Finance Agency (FHFA).
As we can see, in the first graph, the foreclosures we have seen in the first half of 2009 reflect the foreclosure starts from the last half of 2008.
In order to determine the number of foreclosures that will be reported for the second half of 2009, we should look at the foreclosure starts for the first half of 2009. As we can see in the second graph, they skyrocketed:
Foreclosures are about to surge again. Here is a graph showing the major causes of foreclosures.
Unemployment is rising which is causing millions to be unable to pay their mortgage. Sam Khater, senior economist with First American CoreLogic put it well in an article in the Orange County Register:
Mortgage distress is high and rising as is evident by the 90+ day category, which means the pending supply is building up due to high levels of negative equity and rising unemployment. So we have a situation where at the back end (ie REOs) it appears as if it’s getting better, but it’s really a mirage as we know that the pending supply pipeline default (ie 90+ day DQs) is looming larger.
Then, we have the biggest cause of foreclosures: homeowners are falling deeper and deeper into negative equity (where their house is worth less than the mortgage on their home). A Wall Street Journal headline story on November 24 reported that 1 in 4 homeowners are currently underwater.
When a home becomes underwater, the owner finds it harder to justify continuing the mortgage payments. As a matter of fact, a law professor from the University of Arizona just published a paper questioning why more homeowners are not deciding to walk away from their mortgage obligation. This thinking will create even more foreclosures.
The more houses that reach foreclosure, the more home prices will tumble. The more prices tumble, the more houses will fall into negative equity. The more houses that fall into negative equity, the more houses will reach foreclosure. And the cycle continues.
How do we stop this vicious cycle?
Tomorrow, we will discuss the ‘short sale’ process.
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