Even if the disappointingly slow Federal foreclosure program achieves the goals for which it was designed, the foreclosure crisis could be as bad in three years as it is today. A flood of new foreclosures generated by the double whammy of unemployment and resetting exotic loans will overwhelm the government efforts and impede recovery.
That’s the chilling prognosis drawn from three new reports this week projecting dramatically increased numbers of defaults and the Administration’s latest status report on its increasingly desperate efforts to make Making Home Affordable work.
The $75 billion foreclosure program was created to help seven to nine million families keep their homes by the end of 2012, by lowering their monthly payments to a level they can afford either by refinancing their mortgage if it is he/d by Fannie Mae or Freddie Mac or by modifying the terms of their loans.
At Congressional hearings this week, Assistant Treasury Secretary Michael Barr reported that only 85,000 homeowners have actually completed loan modifications six months after the program’s launch March 4. An additional 360,000 are enrolled in three-month trial loan modifications to determine if they can stay current on the new, reduced payment schedule. An additional 2.7 million homeowners have taken advantage of the refinancing through Fannie or Freddie. Though lender participation is improving and steps have been taken to make the refinancing option attractive, experts now predict the program will fall short of its goal by two thirds or more.
Last week RealtyTrac reported no real letdown in the endless bad news on foreclosure filings. August foreclosure filings – default notices, scheduled auctions and bank repossessions – were reported on 358,471 U.S. properties, a slight decline of one percent from July but 18 percent over August 2008. We’re on track for a 4 million foreclosure year. Last year, foreclosure filings were reported on 2,330,483 U.S. properties, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006.
At the current rate reported by RealtyTrac, we can expect 12 million total new foreclosures through 2012, 30 percent more than the most optimistic number of homeowners targeted by the government’s efforts. But there’s more bad news.
Then there is the economy. Prime fixed rate loans, not exotic loans, now account for one third of all delinquencies. These are undoubtedly largely caused by unemployment. The percentage of delinquencies attributable to unemployment has been growing rapidly during the year. Absent an improvement in the overall economic picture, a reduction of layoffs and creation of new jobs, unemployment will continue to drive families into default.
Two new reports last week on two forms of exotic loans expect resets of two types of exotic loans to create $235 to $311 billion worth of new foreclosures over the next three years (see Waves of Resets Promise a New Foreclosure Flood). These reset-caused foreclosures will add to the current foreclosure rate and significantly increase the level of defaults we are now experiencing
Underlying these causes is the real culprit for the foreclosure crisis, negative equity. More than one-fifth (23 percent) of all owners of single family homes with mortgages owe more on a mortgage than their home is currently worth, according to Zillow. Zillow’s valuation data found that U.S. home values fell 12.1 percent year-over-year in the second quarter, marking the 10th consecutive quarter of declines. Owners owing more on a home than it is worth have limited options when it come to refinancing, selling or modifying their loans. A financial shock like losing a job often makes defaulting inevitable. Despite some signs of hope this year, prices won’t improve until foreclosures abate. And homeowners won’t be able to stay in their homes until prices improve. Welcome to Catch-22, the 2009 edition.
Even the Administration seems resigned to a grim future. “Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures, as President Obama noted when he launched the program in February,” testified Secretary Barr.