It is painfully clear that the number one obstacle preventing a complete housing recovery is the foreclosure crisis. According to a recent report released by Realty Trac, almost 3 million homeowners experienced a foreclosure filing in 2009, an all-time record. To put the magnitude of the foreclosure problem in context, last year’s foreclosure total was 21 percent greater than all of the foreclosure filings in 2008 and more than double the total foreclosure filings in 2007.
These numbers represent a harsh reality for many households in America. Almost 3 million households lost their home last year. One in forty-five households was in default last year. The states with the highest foreclosure rates were Nevada, Florida, California and Arizona. The states showing the greatest improvements in the foreclosure situation (i.e., the lowest rates of foreclosure) were Indiana, Ohio and Rhode Island.
Let’s not forget that behind every foreclosure is a lost home and a family in crisis. The emotional stress on a household, particularly with children, is well documented. And the financial stress associated with a foreclosure is a primary reason for separation and divorce.
What is particularly disconcerting about the record number of foreclosures last year is that fact that the Obama Administration exerted great efforts to stem the rising tide of foreclosures. The government created the Home Affordable Modification Program, HAMP, which was designed to reduce the number of foreclosures by providing banks with incentives to modify deteriorating homeowner loans and/or to refinance poor quality loans as well. As of this writing, progress associated with this program has been trivial.
Looking forward, our nation’s foreclosure problems are likely to get worse, not better. There are a meaningful number of delinquent home loans mounting on lender desks. According to the Mortgage Bankers Association’s quarterly delinquency survey, during the third quarter there were a record number of homeowners that missed their monthly mortgage payments for at least three consecutive months. This 90 days and greater past due category portends unfavorably for future foreclosure filings. And word is that this delinquency category continued to deteriorate in the fourth quarter as well. It is likely that a high percentage of these delinquent homeowners will default on their mortgage loans, prompting lenders to file for foreclosure. So the pipeline of potential foreclosure filings is currently swelling among the major financial institutions across the nation.
Some also say that banks held back on foreclosure filings during this past year because of operational issues and an avoidance of booking losses. This suggests that the current pipeline of foreclosure filings is even larger than previously anticipated.
Mounting foreclosure filings are expected to exert downward pressure on home values, suggesting that there will not be stabilization or a revival of home values anytime soon. To make matters worse, the government has begun lifting its housing subsidies which will further weaken the housing sector. The Federal Reserve is phasing out its mortgage security purchase program which brought mortgage rates below 5 percent this past year; mortgage rates are now expected to rise in the coming quarters. In addition, the homebuyer tax credit is expiring in the first half of this year, removing a financial incentive to purchase homes.
On balance, I expect some hesitation in the housing recovery during the next several quarters. There are too many potential foreclosure filings in the pipeline to have any reasonable chance of realizing price stabilization in the near future. And the impending removal of government housing subsidies suggests a marked slowing in future housing demand. These two likely developments depict a fragile housing sector; not yet ready to experience a complete recovery. Unfortunately, 2010 (at least in the first half) may not be the year of a housing turnaround. We will have to wait and see.