The foreclosure crisis continues to affect increasing numbers of homeowners in the United States, driven by such factors as rising unemployment. Lenders are also suffering the effects of the foreclosure crisis, and having to deal with uncertainties in the credit market that could lead to still further losses. The federal government is seeking to find ways to ease the current economic stress, and recently passed new legislation in hopes of helping recovery come sooner.
The foreclosure crisis is still garnering headlines, and while some experts that believe we're nearing the bottom of the foreclosure crisis pit and that recovery can be expected in the near future, there are others who hold somewhat different opinions. Those who believe the crisis is still unfolding point to such factors as rising unemployment, the number of adjustable rate mortgages due to reset, the glut of foreclosed properties on the market, as well as a large number of bank-owned properties not yet officially on the market, and the potential implosion in commercial real estate as demonstrating that foreclosures can be expected to continue rising.
The Obama administration continues its efforts to stem the tide of foreclosures, amidst criticism and with mixed results. Some economic analysts believe a cycle has been set in motion by the inflating and then bursting of the housing bubble and that the fiscal pain of this correction cannot be avoided, but rather must be felt throughout the system from start to finish. Others, however, are sure that the right set of actions can bring the housing market correction and the foreclosure spiral under control.
On May 14, 2009, Reuters reported, citing data from real estate website Zillow.com, that the majority of homeowners in the United States say that they believe the housing market has reached its bottom. The Boston Herald ran a story on May 22, 2009, quoting economists as saying “they’re seeing preliminary signs of the housing market stabilizing” in the northeast and the rest of the nation and predicting recovery to begin next year. In another Reuters article, published on May 18, 2009, quotes “Real Estate mogul” Sam Zell as saying that he expects “housing market stability will appear sometime this summer.”
However, there are many economists and analysts who find these sorts of statements overly optimistic and not supported by current data trends. In a recently published article, Dirk van Dijk pointed to one of the main reasons that many experts believe that the foreclosure crisis is still unfolding, and that is the resetting of what Dijk termed “the ultimate in exploding mortgages” or option adjustable rate mortgages. With option ARMs, borrowers can “pick a payment” and, as Dijk explained, “pay less than the amount of interest on the loan early in the mortgage life, with the difference being added to the principal of the mortgage.”
Once the reset comes, which unlike standard ARMs are not tied to interest rates, “the mortgage holder has to start paying the fully amortizing payment of the now much larger mortgage” and that can cost the monthly payment to rise dramatically, “with increases of over 50% not uncommon.” According to Dijk, who cited data from international financial services group Credit Suisse, the percentage of these types of mortgages that are scheduled for reset is going to increase significantly over the next couple of years, causing more foreclosures as homeowners are unable to make their newly increased payments.
Alt-A loans are also making industry watchers more than a little apprehensive. While many of these loans went to those with good credit, they also were very lax on income documentation. That meant that many people went right to the line with their borrowing, meaning that only if everything went exactly right in life would they be able to maintain payments. A job loss, an injury, or one of life's other random events could easily disrupt the delicate balance, leaving a borrower struggling to make payments, and later, scrambling desperately for a way to stop foreclosure.
And, in today's overall economic climate, the risk of something going wrong is greater, especially with the increasing rates of unemployment and falling home values. According to a New York Times article published on May 24, 2009, chief economist at Moody’s Economy.com Mark Zandi believes we are seeing a third wave of foreclosure rising, one that could sweep the nation like a tidal wave, as foreclosures move out of the sub-prime, Alt-A, jumbo, and exotic mortgages to encompass what the New York Times referred to as “modest borrowers whose loans fit their income.”
There are two primary factors fueling this third wave, according to many analysts. Rising unemployment is one of those factors, as noted by the New York Times article, citing Economy.com as estimating “that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.” The housing market itself is another driving factor in the current foreclosure crisis.
With home values falling, many homeowners are being pushed further and further underwater, owing more on their homes than they are currently worth. Short selling to avoid foreclosure and a variety of other factors are helping to further push home selling prices, and thus market value, down. Another contributing factor, as pointed out in a May 22, 2009, Christian Science Monitor article, is that “only 30 percent of foreclosed homes are currently on the market,” indicating the existence of a “a vast “phantom inventory” that the market has yet to grapple with.” Industry experts fear that when this backlog of homes eventually does hit the market, when the lenders can no longer afford to hold them to avoid selling at such a great loss, that home values will be pushed even lower.
The turmoil in the housing market and its associated foreclosure crisis, as noted in a msnbc.com article published on May 21, 2009, is “crimping a long-awaited economic recovery.” Recognizing this relationship, legislators at all levels, local, state, and federal, have been trying to find ways to address the foreclosure crisis and, to the degree that they can, the housing market issues facing the nation and stressing the economy. President Obama, according to a May 21, 2009, article in the Washington Post, signed new legislation into law on May 20, “to revamp a government foreclosure prevention program and bolster prosecution of mortgage fraud.”
Recent federal efforts have not been as successful as was hoped in helping homeowners avoid foreclosure. For example, according to the Washington Post article, “the Hope for Homeowners program has helped just one borrower since it was launched in October.” Even the bill that recently made it into law lost some of its strongest features during political haggling, such as “a provision that would have allowed bankruptcy judges to modify the mortgages of troubled homeowners.” However, even after the political back and forth, some positive benefits were allowed to remain.
Eligibility requirements for federal mortgage assistance were relaxed, with “lower the cost for both borrowers and lenders.” Furthermore, the new legislation offers better protection for renters caught up in their landlord's foreclosures, and, as reported by the Washington Post, the Justice Department has been granted “expanded authority to prosecute mortgage fraud, including fraud by mortgage brokers and others not directly regulated by federal officials.”
The foreclosure crisis seems to be a part of a larger cycle, a correction that is going to have to work itself out, though efforts by legislators may be able to ease the effects to a certain degree. Homeowners, however, must be proactive in this climate. Begin communicating with lenders and seeking appropriate local, state, and federal assistance as soon as it becomes clear that difficulty in making mortgage payments isn't just a temporary, soon to be resolved problem. The sooner a person acts, the more options there are available. Honest assessment of the situation is essential, because sometimes it just doesn't make financial sense to fight to keep that dream home, when resources could better be applied to something more affordable.
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