Archive for October, 2010

The American Housing Crisis

Monday, October 25th, 2010

The American Housing Crisis
By: Peter Daoust

The housing crisis in the United States isn’t something that popped up overnight. Even back when G. Bush was in power he signed “The Mortgage Foregiveness Debt Relief Act”.
Joseph Schuman, a senior correspondent for AOL news wrote an article on Oct. 15th 2010 he called “From Bad to Worse? A Foreclosure Crisis”. Google it if you wish. The first line of his article says “The American housing mess just keeps getting messier.” He then goes on to offer the following statistics:
1. Foreclosures in the U.S. during the three summer months hit 930,437, up 4% from the previous quarter (1 in every 139 houses).
2. Foreclosures in September alone were 347,420 up 3% from August
3. In August there was an 8.6 month supply of new houses on the market – up from 7.8 a year earlier and a low of 6.3 month in April
In recent weeks several of the largest U.S. lenders have suspended foreclosures because they are so backed up and have to sort their way through this mess. In the worst hit areas millions have no equity left – with little hope of seeing any anytime soon. Other people are under water and still continue to make payments. In Florida and Nevada 1 in 5 are 90 days or more late in their mortgage payments and in Arizona and California its 1 in 8 according to the Federal Reserve Fund of New York. Prices too are dropping. Statewide in Florida, the median condo sale price in Florida in August 2010 was $81,600, down from $107,200 in August 2009, or a decrease of 24%.
Obama’s Federal Home Buyer Credit has now expired and most subprime mortgage lenders have disappeared.
What now happens when property owners are forced into short sales? Well the answer varies from state to state and some states are called “nonrecourse states” including California and Arizona where the banks have to eat the loss if there is a shortfall. This itself may be another reason why many of the largest lenders have suspended additional foreclosures. Do they really want to report more losses on their books in the near term?
Who is to blame for this mess? Was it caused by the practices of sub prime lenders, lack of government oversight, mortgage brokers steering borrowers into unaffordable loans, appraisers inflating house values or speculators consumed by greed? Will it be the taxpayers who now will have to bail out the banks?
Ironically enough, some of their short term solutions will actually drive the market further south. One small example is in how borrowing for a Fannie Mae approved mortgage on a condominium unit the complex must now have:
1. Less than 15% of condo owners in the building delinquent on their condo fees
2. The association must have enough funds on hand to meet the deductable on their insurance policy
3. At least 10% of the operating budget must be set aside for reserves
4. Projects can not contain more than 20% non-residential space
5. No more than 10% of the units may be owned by a single entity.
What this means is that getting high ratio mortgages in many complexes may now be that much more difficult to do – a further negative to the market in the short term.
How does Joseph Schuman end his “From Bad to Worse” article? Well he worries over the effects of many lenders suspending their foreclosure actions given that sales of pre-foreclosures and foreclosed properties account for 1/3 of all sales activity. Will this activity cause even more uncertainty in the marketplace? It is his opinion that given this new crisis of confidence – all bets on the wider economic recovery are now off the table.
I now have to wonder if we will see pictures of Obama vacationing on the beaches of Hawaii in the newspaper or on the internet like we did see last summer.