Burning Down the House

Stories come and go from the headlines. The underlying issues that grab our attention are not so quick to flare up and burn out. We have not yet developed anything like a system that works to solve our massive housing woes.

Millions of families' homes were foreclosed last year. Millions more will be foreclosed in 2010. More than 7 million homes are in the ever expanding foreclosure pipeline as you read these words. This pipeline includes folks 30 to 90 days late in payment and those in the foreclosure process. Stories of improvement aside, more than 7 million households will likely to lose their homes over the next few years. Of course, this does not have to happen. It will happen if we stay on the course we have followed for the last 2 years. The biggest pressures raising this number are falling home prices, high mortgage debt to price ratios and unemployment. We should expect another 6-10% decrease in the median US home price over the next 18 months. Home price declines, debt, unemployment and present foreclosures are driving future foreclosures. Unemployment will average in the 8.5% to 9.5% range in 2010. The long term unemployed, out of work for 27 weeks plus, are rising as well. We may have shifted our focus from housing, the fires are still raging. Nearly one in four of America's 56million homeowners owe more on their home than the present market value of the home.

On 11 February 2010 Realty Trac released its most recent report on US Foreclosures. This provides us with the most current update on the foreclosure pipeline. There were 315,716 foreclosure filings across January 2010. This includes all default notices, auction notices and foreclosures. The foreclosure process takes many months and varies widely from state to state. Thus, there are many more notices and actions than actual homes foreclosed. January 2010 saw a 10% decrease in actions from December 2009 but a 15% increase from January 2009. This seasonal pattern has held for 2 years. Foreclosure auctions were up 15% from January 2009 to January 2010. In short, we have not solved this problem

Foreclosure breeds foreclosure. This is sometimes called the contagion effect. It has been shown that a foreclosure in the immediate area tends to reduce the value of homes in the vicinity by 1%. As home values fall and homes fall into disrepair, yesterday's foreclosures set up tomorrow's foreclosures. Families are more likely to give up the struggle to pay as the neighborhood runs down and empty homes surround. This is why we see clusters of foreclosures by state, region and neighborhood. Nevada has had the highest foreclosure rate in America for 37 months through January 2010. Six states account for 60% of America's foreclosures: Arizona, California, Florida, Illinois, Michigan and Nevada. You may or may not live in or a near a cluster of foreclosed properties. You are affected, we all are. Increasingly there is trouble in prime mortgage markets and high end homes. Our Federal Government is involved and buying and assuring millions of mortgages. Losses are running into the tens of billions of dollars per quarter on this process. Thus, no area or group is unaffected.

Mortgage modifications continue to fail in large numbers. Nearly one in four Americans now owes more on her/his home than the market price of the home. Staying in the home under present conditions likely reduces the wealth building ability of millions. This contributes to today's historically elevated rates of missed payment and default. Late in the struggle families reach out for help. This takes time and is often not successful. Some help is available and we have seen large increases in access to modifications over the last few months. However, most loan modifications involve reductions in interest rates and suspension of a portion of principle repayment. These types of mortgage modifications fail at over 50% within 12 months. The most creditor painful modifications, those that reduce the principle owed, are the most successful. However, these too often fail within a year. This means that our system for addressing distressed homeowners results in over 50% of those who receive modifications failing to make full and timely payments again within 1 year. Other options to distressed homeowners include short sales and deed in lieu of foreclosure procedures. Both short sales and deeds in lieu are difficult to negotiate. A short sale occurs when a home is sold for less than the debt owed by the present "homeowner". This requires creditor permission. The deed in lieu of foreclosure option involves the homeowner surrendering the property to avoid a foreclosure process.

Home equity is the best defense against delinquency and default. The slide in US home prices has left millions owing more than their homes are likely to be worth in the near future. Millions of families have low or no equity- ownership- in their own homes. This lack of ownership is the single best predictor of future delinquency and default. As a borrower becomes 60 or more days late in payment she/he is usually deemed delinquent. As he/she continues to not pay in full, they enter the delinquency, default, foreclosure and auction notice processes. These processes vary by state and lender. People who owe much, all, or more than the home's value, are giving up. Banks are slowing the foreclosure process as they don't want public anger, tax and upkeep liability on houses they can't sell. Often this is misunderstood as improvement in the market. Some folks walk away, others get modifications and still others soldier on. We can see the roots of this disaster in the shrinkage of home equity over the last 6 years. In 2004 the average American owned 59% of their home. At the end of 2009 the average American owned 38% of their home. [1] As prices fall and debt levels stay put, the incentive to pay is eroded.

We need a streamlined system to work people through this process. We don't have one in place. Many will lose their homes, they could become renters and the properties could remain full and maintained. Millions could be kept in their homes under customized terms that take into account their incomes, debt levels and ability to pay. There are better options open to us. We need to stay focused on this issue and see it through to a socially acceptable conclusion. If we don't, we will check in, from time to time, on this disaster as it swallows millions of our families, slows employment and economic growth and drains money from our local, state and National coffers.

1) Federal Reserve Z1 Flow of Funds Dec 2009. Table 104B Line 50.