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Plunging home prices, increasing job losses part of problem as government seeks solution
By Alan Zibel
Associated Press
Published on Monday, Oct 27, 2008
WASHINGTON: Each day from July through September, more than 2,700 Americans lost their homes in foreclosure.
That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.
The mortgage market's troubles have proved to be far more serious and intractable than most in government or the private sector had predicted a year ago.
''We are behind the curve. We are falling behind,'' Sheila Bair, head of the Federal Deposit Insurance Corp., told a Senate hearing Thursday. ''There has been some progress, but it's not been enough, and we need to act. And we need to act quickly, and we need to act dramatically to have more wide-scale, systematic [loan] modifications.''
More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.
So why is the foreclosure crisis so hard to fix?
There are five main reasons:
Crashing home prices
A massive speculative bubble in housing prices caused millions of Americans to think of their homes as an investment rather than a place to live.
Now prices are plummeting, especially in once-sizzling markets like
California, Florida and Nevada. And the bleeding might not stop until the end of next year.
The median home price in the United States dropped 9 percent in September from a year ago to $191,600, and is down 17 percent from the peak in July 2006, the National Association of Realtors said Friday.
Already, 23 percent of homeowners with a mortgage owe more on their loans than their homes are worth, and that figure is expected to rise to 28 percent by this time next year, according to Moody's Economy.com.
While the majority of homeowners will continue to make their payments and wait for values to recover, some will mail their keys to their lender and walk away, leaving the lender with no choice but to foreclose.
Investor speculation
Plunging prices have had even more impact on investors than on homeowners because investors have less emotional attachment to a house. They're even more likely to walk away, especially if they've put little money into a property.
Investors purchased one of every five homes last year, and almost one of every three when the market peaked in 2005, according to the Realtors trade group.
They flocked to hot markets like California, Florida, Nevada and Arizona, as television shows such as A&E's popular reality series Flip This House touted the easy money that could be made buying and selling homes.
They took advantage of risky loans that didn't require down payments or proof of income. Other loans allowed the borrower to pay only the interest, or even less, and none of the principal for a certain time.
Complex investments
Traditionally, lenders evaluated borrowers carefully because they held onto the mortgages for the life of the loan. That process started to change in the late 1980s, as Wall Street found new ways to package the loans into securities to sell to investors.
Investors were attracted to these new mortgage-backed securities because they paid better returns than government bonds.
At the beginning of this decade, the Federal Reserve started cutting interest rates to historic lows. So investors poured money into the U.S. mortgage market, particularly into securities made up of high-interest mortgages made to borrowers with poor credit records.
The high-interest, risky mortgages, called ''subprime,'' boomed, from $160 billion in new loans in 2001 to more than $600 billion in both 2005 and 2006, according to Inside Mortgage Finance, a trade publication.
Lenders stopped worrying about the creditworthiness of borrowers and offered them ever-riskier mortgages. Most of those loans were made by commission-driven mortgage brokers who had nothing to lose if the mortgage went bad because it had been resold.
''By the time it defaults, it's somebody else's headache,'' said Barry Ritholtz, chief executive of research firm FusionIQ.
Job losses
The No. 1 reason people fall behind on their mortgage is loss of a job, or some source of income, perhaps because of a divorce or death of a spouse. If a borrower is unemployed, lenders don't have many options but foreclosure.
Two years ago, about 36 percent of mortgage delinquencies were caused by loss of income or unemployment, according to research by mortgage finance company Freddie Mac. But that number has risen to 45 percent this year as the unemployment rate has ticked up to a five-year high of 6.1 percent.
Jon Falen, 33, put his four-bedroom house in Olathe, Kan., with high-end appliances, granite kitchen countertops and a landscaped lot, on the market more than two years ago after health problems forced him to leave his job as an air traffic controller.
Falen and his wife, now delinquent on their two home loans, are finally scheduled to sell their house next month.
But there's a big catch: The buyer has agreed to pay only $490,000, which is $70,000 less than what the couple paid for it in 2002.
Falling behind again
It's hard to fix something that keeps breaking. Roughly one-third of all subprime loans modified in the third quarter of last year were delinquent again within 10 months, according to a Credit Suisse report released this month.
Maria Martinez, 57, an administrative worker at the county jail in Stockton, Calif., is typical of homeowners who have gotten help, but not enough. She is three months behind on her mortgage, even after receiving a loan modification earlier this year.
Though Martinez bought the house more than a decade ago for only $76,000, she now owes about $230,000 because she refinanced her home loan several times.
''I was trying to borrow some money to pay some bills,'' said Martinez, who is on leave from her job after being diagnosed with cancer. ''I didn't really think . . . that I would get into a bind like this.''
WASHINGTON: Each day from July through September, more than 2,700 Americans lost their homes in foreclosure.
Get the full article here.
Comments
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Posted 12:43 PM, 10/27/2008
I read a book called “Mortgage Meltdown” and it really helped me understand that I’m not the only one going through this. I was also able to apply for a grant from a non-profit to help me with my mortgage. I think anyone who is trying to save his or her home, like me, should read this. Go to www.48grant.com
Cuyahoga Falls, OH
Posted 06:56 PM, 10/27/2008
The mortgage market will stabilize itself, on that point everyone agrees... they ain't, as they say, makin' any more land. The problem is weathering the storm, and this situation can happen to anyone these days it seems. Right now it's an apparent downward spiral... what interest can a bank have in foreclosure when they can't make a profit on real estate any more than the owners themselves? The same thing happened in the Depression, when stock investors were allowed to put up stock as capital rather than cash. It's essentially the same thing going on here, where banks justified the predatory loans they made to their own investors by saying hey guys, we'll end up with the house in the end! Trouble was, they did.
