The Mortgage Problem - How We Got Here
Feb 3rd, 2009 | By Rob | Category: housing
Absent some breaking news on the credit card front, I’ve decided to spend the next couple of days looking at mortgage modifications and the foreclosure process. Although this is generally a website about credit card debt, I can’t help but occasionally stray on to the hot topics of the day. It’s interesting to me, and I expect that the information might ultimately prove useful to more than one reader.
I will start where anyone analyzing a problem should start - what’s the problem and how did we get here? It has been a long two years for many homeowners and individuals in the real estate industry. I remember back to the days in 2005-2006 when so-called bubble bloggers predicted the downfall of the real estate market as many bet that housing prices would keep going up. I wonder now if any of them predicted the ultimate ripple effects that the reversal of our real estate economy would have on the nation as a whole.
According to Realty Trac, there were more than 3.1 million foreclosure filings in 2008. That means one out of every 54 households, or nearly 2% of homeowners in the United States, received notice of the beginning of a foreclosure proceeding. Ultimately, whether because of mortgage loan modifications, repayment by the owner, foreclosure moratoriums, or simply the length of time that the foreclosure process can take between filing and sheriff sale, only about 860,000 owners lost their homes to foreclosure in 2008.
And with growing unemployment, a stagnant real estate market, and falling home prices, there’s no evidence that the problem will get better anytime soon. Credit Suisse estimates that, over the next four years, there will be eight million homes lost to foreclosure. And Realty Trac believes that that we will see another year of at least 3 million foreclosure filings in the United States.
Yet, at the same time that you will see the news runs stories about whole blocks of homes in foreclosure and the statistics that foreclosures are up 81%, the Mortgage Bankers Association says that the number of mortgages 30 days past due is actually lower than in 2001. The increase falls squarely on the fact that 80% of homeowners in California and Florida who miss a payment end up in foreclosure. You can read more about this in this CNN article.
Home ownership levels in 2006 were higher than ever in the United States. The securitization of the mortgage market induced many lenders to lower their lending standards, while low interest rates and interest-only loans, adjustable rate mortgages, low down payment plans, subprime and “no doc” loans made home ownership “more affordable” than ever for those seeking the American dream. But for many, that dream became a nightmare when home prices stopped rocketing upward and began declining.
Investors who had leveraged their money to “invest” (read … speculate) in real estate and home builders completing a flood of new residential construction and buildings converted into condominiums began to attempt to liquidate their portfolio of homes as the number of new home buyers fell.
whether through disruptions in income because of unemployment, marital problems, or relocation plans, or simply poor fiscal responsibilty in taking on too much debt, individual homeowners began needing to sell their homes as well. And those who had taken on an adjustable rate mortgage or interest only loan faced the prospect of an interest rate adjustment to a monthly payment which they could not afford or a balloon payment which they either could not refinance (as mortgage lenders tightened standards and withdrew from the subprime mortgage market) or could not sell (because the value of their home had declined to the point where they were under water and would have to bring money to the closing table to cover the difference between the amount that they would receive for their house and the amount that they owed their mortgage company).
If the real estate market had been flat or slowly increasing in value, many of these homeowners could have simply sold their home and moved. But buyers ran for the hills and the inventory of unsold homes grew every month. With the supply of homes greater than the demand from buyers, the prices dropped (and in some places, plummeted). Because homeownership was at record levels, there were simply less new demand coming into the market. And as lenders dropped their subprime programs, more potential home buyers were taken out of the market. And the increase in interest rates made the monthly payments on the new mortgages of homebuyers more expensive, allowing them to afford less home for their buck. Owners watched as the value of their home declined.
Some homeowners gave up and eventually sent their keys back to the mortgage company. Others were foreclosed upon after they struggled but were unable to make payments. Some received mortgage modifications, and many others are still struggling to sell their home, find a job which will allow them to keep their home, or find a way to avoid foreclosure.
The flood of foreclosures and unmaintained homes on the market has started a vicious cycle, and
government programs haven’t made a dent in the problem. The crisis has spread from individual homeowners, and home builders or investors, to some of the largest investment banks and insurance companies in the world. It has created a crisis of confidence that has led to the repricing of risk throughout financial instruments and economic conditions that some have called the most challenging since the Great Depression.
I think I’ll leave my historical examination there. In the next post, I’ll examine the loan modification programs and the players in the industry for those interested in modifying their mortgage.
