Sunday, February 13, 2011

Home foreclosures likely to grow

General Motors made a profit in 2010. Ford made even more than GM. The Dow Jones has regained more than 75 percent of its 2009 losses. Have we made the turnaround?
Not in the housing industry.
There are about 80 million homes in the U.S., and about 40 million have mortgages. About 10 million have an additional second mortgage in the form of a "home equity" loan. As the housing market was imploding in 2007, many home prices dropped in value below the amount of the outstanding mortgage -- they were "under water."
Twenty-three percent of the mortgages in the U.S. are underwater -- that's more than 9 million. Of those, 16 percent have mortgages which are underwater by more than 10 percent of the mortgage's unpaid balance. Almost 10 percent of all mortgages -- about 4 million -- are under water by more than 25 percent of the home's value.
The majority of all U.S. mortgages were underwritten by the combination of the Federal National Mortgage Association, Fannie Mae; and the Federal Home Mortgage Corporation, Freddie Mac. They held 90 percent of the secondary mortgage market by 2005.
Fannie was started in 1938 by President Franklin Roosevelt as a stimulus to the ailing economy. Initially it was a part of the U.S. government. As such, it could borrow money at low interest rates because any failure had the full faith and credit of the United States. In 1970, President Nixon created Freddie Mac.
In 1968, President Lyndon Johnson privatized Fannie. It was now known as a "government-sponsored enterprise." Although it technically did not have the full faith and credit behind it, it was taken for granted that the U.S. would back up any problem. It was referred to as an "implicitly taxpayer-backed agency" -- but now run as separate, for-profit corporation. Investors would purchase its stock and then it would purchase mortgages from primary mortgage lenders, making it a secondary mortgage lender.
It was profitable because of the implicit promise: It could borrow from lenders around the world at interest rates lower than it was being paid by the borrowers of the mortgages they bought.
The imploding housing market caused millions of dollars of losses in 2007. In 2008, Fannie and Freddie admitted to "accounting errors" of between $4.5 and $4.7 billion. More and more underwater mortgages started piling up until it appeared certain they would both fail. To avoid collapse of our economy, the federal government purchased 79.9 percent of each one on Sept. 9, 2008.
Fannie and Freddie now had to sell their growing inventory of foreclosed homes. It was necessary to hire a locksmith to re-key the house and repair any damages the previous owner caused on his way out. A common trick was to remove the built-in appliances as well as the kitchen cabinets.
Normal maintenance was also required. Cutting the grass cost $80 every two weeks -- amounting to a monthly bill of $10 million. In total, all the upkeep, refurbishments and taxes cost taxpayers more than $1 billion per year.
The houses they were able to sell brought in about 60 percent of the unpaid remaining amount of the mortgage. In areas such as Arizona, California and Florida, it was less than 50 percent. Because central Ohio didn't experience the previous huge price inflation of those states, we have not experienced such a steep drop. Average home prices here peaked at about $175,000 in 2005 but only declined to just under $159,000 by 2010 -- lower in Columbus and higher in the suburbs.
Fannie and Freddie were required to write down the value of the mortgage, paying the primary lender the amount of the write-down.
So far, keeping Fannie and Freddie going has required $145.9 billion of taxpayer money. It is estimated the total will grow to $389 billion, making them the largest bailout from the "Great Bush Recession."
Nationwide, there were 2.9 million foreclosure filings in 2010 -- up 2 percent from 2009. The foreclosure rate might slow down later this year, but probably not during the first half. That is the result of a mid-2010 scandal where bankers and lawyers were improperly processing the data of the mortgages. There was one case where a home was foreclosed but it had no mortgage at all.
This caused a bubble to build up during a slow-down in actual foreclosures during the fourth quarter of 2010, which will spill over into the first quarter of 2011.
The saddest part of this whole tale is that 2.3 million American families have lost their homes to foreclosure, with more to come.

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