Reuters: One in 8 U.S. homeowners late paying or in foreclosure

According to this Reuters article, One in 8 U.S. homeowners late paying or in foreclosure, 1 out of 8 US homeowners is behind on their mortgage, or already in foreclosure. This is absolutely stunning. According to the article even prime loans are experiencing higher foreclosure rates caused by job losses and overbuilding. The author of the article did not seem optimistic that Obama's foreclosure plan would work. I agree. This will certainly lead to more short sales and foreclosures and result in hurting the housing market even more. Since Tennessee has a higher than average number of foreclosures I expect the TN housing market to be hurt more than average over the next several years.

New Government Programs to Reduce Home Foreclosures

According to the article U.S. Sets Big Incentives to Head Off Foreclosures on the New York Times website the Obama Administration unveiled two new plans that will help many in people in foreclosure.

In my opinion neither plan will not solve the foreclosure problem.  The problems with the plans are as follows:

1. Investors are excluded.  Since many foreclosures, particularly in Florida, Nevada, Arizona and California were from investors (actually speculators) those foreclosures will continue.
   
2. Second homes and vacation homes are excluded.  Since many people not only purchased too much home for their budget, but also too many properties (i.e. second homes and vacation homes) they got into financial trouble.  Since the plans do not cover these owners the foreclosures will continue.
3. Many people who are in foreclosure are there as a result of not being financially responsible.  I have personally seen people with combined incomes of almost $100,000 not be able to pay mortgages payments of $2,000 to $2,400 per month (includes principal, interest, taxes and insurance).  The Obama plans allow for mortgage payments to be as low as 31% of a person's income via paying matching funds to the lenders.  The numbers I show above are less than 31% yet those people still did not pay.  The reality is that the housing payment is only one part of the problem.  Typically, these people had a lot of other debt and just spent recklessly.
4. Both plans require that the home owners have enough income to pay the modified payment.  This is meaningless if the people have lost their job due to health issues or the current economy.  For a while now health issues which cause a person to lose their job have been a big factor in foreclosures.  Since the plans require that people have a job people in this position will not be helped by the plans.
5. Plan 1 (Refinancing for Strong Borrowers) limits the total new loan to a maximum of 105% of the home's current market value.  Since many people now owe far more than their home is worth even if they are current on their mortgage payments they will not see any help from Plan 1.  The result will be that these homeowners will eventually slip into foreclosure as the market value of their home declines.
6. Plan 2 (Loan Modifications for At-Risk Borrowers) does not place a limit on the loan amount with respect to the market value of the home, but it limits the reduced modified payments to a term of 5 years.  After 5 years the interest rate will probably reset to today's market rates.  The problem is that for may people they still will not be able to pay the market rate in 5 years.  Also, this Plan fails to address the issue of what happens when the people cannot pay the modified mortgage and the loan amount is still greater than the market value.  In short, this plan is betting that the market values will substantially improve in 5 years.
7. Neither plan addresses the core reasons of why we are in this mess to begin with.  The core reasons are: (1) Homes and real estate just got too expensive as a result abnormal demand caused by what I call "housing euphoria" which resulted from an increase in the homeownership rate that was enabled by loose credit standards.  (2) People started buying homes that they could barely afford even with a 2 income family so there was no room for any job loss.  (3) People purchased homes with risky adjustable rate mortgages in order to allow them to buy more home in the short run without regard for any rainly days or "what if's".  (4) People just borrowed and spent too much in general.

Top 5 Reasons to Pursue a Short Sale versus Letting Your Home Be Foreclosed

1. Stress - A short sale is less stressful than a foreclosure.  With a short sale you have some say in the outcome.  With a foreclosure you are at the mercy of 3rd parties.
2. Credit - A short sale is less damaging to your credit.  Either way you will have late payments on your credit report, but with a successful Short Sale the debt will usually be listed as satisfied.  A foreclosure will show up on your credit report.
3. Time - If you notify your lender that you are trying to sell your home many times they will give you more time to stay in your home while you are trying to sell it.  You will likely not have to pay your mortgage during this time.  You should use this time to save your money so you will have some money to move and find another place to live.
4. Release - If you successfully close a short sale you will usually be released of remaining unpaid debt.  In many states, with a foreclosure the lender can continue to legally pursue you after the foreclosure proceedings are over in order to try to recover the amount of the debt they were still owed after the lender sells the home (it is called a deficiency judgment).  Walking away without having any further obligation to repay a debt is reason enough to pursue a short sale.
5. Responsibility - The responsible thing to do is to pursue a short sale.  Most homes are foreclosed simply because the owners refuse to face reality and will not deal with the situation.  This hurts the homeowner and the lender.  There is no reason for this.  The responsible thing to do is to mitigate the lender's loss and give yourself a chance at a future without that remaining mortgage debt weighing you down.

Bloomberg.com Article: U.S. Existing Home Sales, Prices Slumped in January

According to this Bloomberg.com article U.S. Existing Home Sales, Prices Slumped in January.

The gist ofthe article is that the declining economy is going to going to continue to drag down the housing market as consumer confidence also declines.

According to the article the economy will likley not rebound with respect to unemployment until 2011.

The article quotes Lawrence Yun, the chief economist for the National Association of REALTORS (NAR), as saying that the recent goverment actions may lift home resales by as much as 900,000 units this year.

Being a REALTOR myself, I have read Mr. Yun's predictions many times over the past 3 years. 

I have to say that he has said the market would improve in 2006, 2007 and 2008.

Each time he was wrong and he will be wrong this time as well. Despite what NAR would like

consumers to believe, homes are still not affordbale. NAR's way determining home affordability is

to factor in financing (see the NAR Home Affordability Index). The problem is that when financing

is abnormally cheap (i.e. like during the market boom) it lends itself to over-inflated prices (like during the market boom).

The result is that when rates increase the home owners cannot sell their home for as much as they paid and a whole

new problem starts just like what we see now. The fact is that prior to the huge run up in home prices that started

around 2000, the median home price in a given area was more related to the median income in that area.

For homeowners to be financially solvent the ration of home prices to median income needs to be around 2 to 1

with an absolute maximum of 3 to 1. Now even after the market declines that started in 2006

the median price of a home in most areas of the US is 3-4 times the median household income

meaning that 2 people now need to work to buy a home as opposed to just one worker in each

household. Two family incomes helped push up the median price and this was worsened by

consumers accepting more debt as being OK. Historically, the values of real estate were

determined by the quality of life that the location offered, the size and type of property and

local employment prospects. Unfortunately, during the most recent run up in prices the major

factor was the monthly housing payment versus household income. As rates went lower and

financing became more available, prices increased until the prices reached a popping point.

That cannot happen again, otherwise, we will see the same problems all over again. The solution

is that real estate prices need to continue to decline for a while longer in order to bring affordability

more in line with common sense criteria, not monthly housing payments.

In Bloomberg Interview, Harris of Barclays Capital Says President Obama is doing the "Right Thing" for U.S. Housing

Accroding to this Bloomberg interview with Ethan Harris, Co-Head of U.S. Economics Research for Barclays Capital, President Obama is Doing the "Right Thing" for U.S. Housing.

I disagree with his assessment.  This entire financial crisis was caused by:

1. Too much total consumer debt including real estate and non-real estate debt.
2. A natural waning of housing prices after a "too good to be true" run up in real estate prices.
3. A decline in the secondary market for debt instruments largely due to concerns about issues above.

Unfortunately, President Obama's plan is to try and solve a problem caused by debt with more debt to finance his massive spending plan.   Economists and media pundits are now referring back to the Great Depression to try to analyze the effectiveness of President Roosevelt's New Deal to compare it to President Obama's "Newer Deal".  Increasingly, economists are forced to admit that Roosevelt's New Deal did not stop the Great Depression, and in fact, according to some economists made the economy worse.  While that is still an issue to be debated, there can be no doubt that the current financial crisis differs from the Great Depression in one significant repspect: one major cause of the Great Depression, drought and widespread crop failures, are completely absent from our current situation.  Drought and crop failure is a tangible and understandable problem.  Our current financial crisis, on the other hand, is almost entirely due to poor financial decision making by banks (mortgage companies and investment banks) and individuals (the people who borrowed more than they ever could repay).  Therefore, I fail to see how a small number of infrastructure projects and some other haphazard spending can get us out of a mess caused by debt if those projects are going to be financed by debt.  In order to solve this problem total debt cannot be increased and debt payments must decrease in order to lessen the burden on consumers.

In order to properly address this current financial crisis I think a simpler solution would be for the Federal Reserve to take all the debt off of all the banks' books at current market value by:

• Swapping out all the residential mortgage debt held by US Banks (totals approximately $11.3 Trillion) in exchange for US Treasuries with a guaranteed yield of say 2.5% with provisions for the banks to sell of the Treasuries in controlled allotments in order to raise cash.  Currently the total value of all US Federal debt is $10.76 Trillion.  Therefore, this plan would essentially double the national debt.  However, since it is really a debt swap the total of all US public and private debt would remain the same at about $53 Trillion.
• The Fed would then alter the terms of all the mortgages "purchased" so that all people current on their mortgages and have equity would receive a reduced interest rate of 3%.  People who are current, but have no equity would receive 3.5%, people who have equity, but are delinquent (assuming they can pay the mortgage after the reduction) would get 4% and people who have no equity and are delinquent (assuming they can pay the mortgage after the reduction) would get 4.5%.  Any people with negative equity would have been dealt at the time of the Fed's "purchase" of their mortgages since the Fed would be paying a discounted amount for their mortgages (i.e. the banks would take a haircut by reducing the face values of these assets).  The delinquent homeowners with negative equity would also share the pain by agreeing to pay the Fed 10% of future home appreciation in order to make up for the higher rate of default.
  

The initial cost of this plan would be very little.  The long term cost to the Fed (and US Taxpayers) would be the risk of mortgage default, which would be spread over time anyway.  Since the banks would now have 100% performing and guaranteed assets on their books instead of non-performing mortgage assets they would be saved.  Since there would be a provision for the banks to sell off the Treasuries in controlled amounts their capital would be replenished in an organized fashion thus leading to a return of normal lending.  Since the problem in the economy was and is too much consumer and business debt including, but not limited to, real estate and the near complete evaporation of the secondary market for debt instruments this plan would work by creating the secondary market (the Fed) and reducing debt payment levels by reducing interest rates of homeowners.  In short this would be the same as a tax cut for homeowners thus putting more money back into the economy, some of which would surely be spent.  Since my plan is a debt swapping/debt shifting plan it will not increase total debt, thus not creating any additional burden on taxpayers or the economy.  Conversely, the President's plan of borrowing more money to spend will increase debt and probably make things worse in the long run.