3 Million Foreclosures Forecast THIS YEAR

Editor’s Note: Reality has a nasty way of getting in the way of solutions, especially when the solutions are theoretical, and even worse when the theories are wrong. These are the wrong assumptions:

1. The Worst is over. In fact, we have the probability of at least 7 million MORE homes that will be foreclosed, causing massive dislocation from available housing to unavailable housing. The additional pressure on housing prices will be relentless.
2. Modifications by Servicers: You might as well ask the robber of a convenience store to negotiate the restitution. The intermediaries have nothing to gain and everything to lose by modifications.
3. The Financial Crisis is Over: In fact, we have a whole new wave of bad news coming. Finance is trust. There is no trust without truth. The truth is that the paper, the houses and the policies are all based upon false values and the marketplace knows it. Owning up to the truth will be painful for some and windfall for others — but it is the only path of restoring confidence in our institutions. With confidence we can again build trust. With trust, our financial system can recover. There is no current scenario in play that is likely to restore trust. Hence, there is no reason to believe that our crisis is over or that it won’t get worse.
4. The current recovery model is working: Take a look next door at Canada. No crisis, no crash, no currency devaluation, no problem. Why? Because their policies are focused on protection of the consumer instead of advancement of big business. Their banks are all too big to fail (see Krugman today in New York times) but they didn’t fail because they operated in an environment that mandated acting in a “boring” manner. It is obvious that 80% of American citizens understand all this, why don’t our leaders?
5. Millions, perhaps tens of millions of homeowners owe more than their houses are worth: In fact, those obligations have been dispersed into cyberspace and a  fair reckoning must (a) face the reality of real fair market values and (b) spreading the losses out amongst all the players. Instead our policies are aimed at preserving the appearance of transfer of wealth to a select few on Wall Street — parties who don’t own, never owned and never will own the “troubled assets” for which they received “bailout” money. The money that was taken out of the securitization chain without the knowledge or consent of the investors and the homeowners is a third party payment of the original obligation. The truth is that if normal legal and accounting principles are followed, those people have substantial equity in their homes but they are being convinced everyday that they don’t.
6. The Crisis was Caused by Bad Decisions: In fact, the crisis was caused by deliberate decisions that worked perfectly for those who made them. The plan was to create loans that were too bad to succeed. The plan worked and the money flowed to Wall Street which in turn admits to having the best year ever, and which is hiding the rest of its profits with perfect confidence that they can report higher and higher earnings for years to come as they repatriate dollars they secreted off shore in unreported financial transactions.
7. What is Good for Wall Street is Good for the Country: In fact, this is no more true than when it was said about General Motors. A strong financial center is important — but not a financial center that becomes 40% of our economy. This is nothing more than a parlor trick of moving paper back and forth between the players and claiming a profit. The truth, as ANY economist will tell you is that what is good for the middle class is good for the country. Any other policy leads to social chaos and financial ruin.
8. Eventually, this will all even out and everything will go back to normal: Sorry. In fact as long as the government is regulated by big business instead of the other way around, no correction is possible and the country continues down the path to ruin. Picture a basketball game where the players were able to tell the referees how they may rule and what they should look at. No, this cannot fix itself without the people breaking the power grip of big banks and big business. There is currently no scenario in play that points in this direction. So it is wrong to think that it will all work out in the end as things now stand.
9. The Crisis Caused a Deficit in Government Finance: Actually, no, it didn’t. Just as the homeowners actually have equity in their homes, the government is owed more in taxes, fees, fines and penalties than all the deficits —Federal and State — put together. But they won’t collect those taxes from their bosses — Wall Street big business.

Jan. 29 (Bloomberg) — President Barack Obama’s efforts to bolster the U.S. housing market, the trigger of the worst recession since the 1930s, may be undone by record unemployment and repossessions by lenders.

Foreclosures probably will reach 3 million this year, surpassing the record of 2.82 million in 2009, according to Irvine, California-based RealtyTrac Inc. That would more than offset an estimated 448,000-unit rise in home sales, based on the average forecast of the National Association of Realtors, the Mortgage Bankers Association and Fannie Mae.

The housing industry remains a challenge for Obama as he enters his second year of office and government assistance programs near expiration. Data this week showed home sales tumbled after the expected end of an $8,000 tax credit for first-time buyers boosted transactions the prior month.

“The housing market is still on life support, and if government measures are withdrawn too quickly it could sink it, taking the economy down with it,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “Households have such high debt loads, in addition to their mortgages, that any reduction in income, including a job loss, could trigger a foreclosure.”

Employers have cut more than 7 million jobs in the last two years, the biggest employment loss since the Great Depression. The U.S. jobless rate probably will average 10 percent in 2010, according to the median estimate of 59 economists surveyed by Bloomberg. That would be the highest yearly rate in government records dating to 1948. Unemployment was 9.3 percent in 2009, the most in 26 years.

Mortgage Modifications

The Obama administration’s primary anti-foreclosure plan, the Home Affordable Modification Program, or HAMP, resulted in 66,465 permanent modifications by the end of December, compared with goal of up to 4 million by 2012. In total, 1.16 million offers were extended to borrowers and the terms of about 900,000 mortgages were changed on either a trial or permanent basis, the Treasury Department said in a Jan. 15 report.

“We’re working to lift the value of a family’s single largest investment — their home,” Obama said in his Jan. 27 State of the Union speech to Congress.

For HAMP to succeed, the program will have to be changed to include principal reductions on mortgages to offset value declines, according to Karen Weaver, global head of securitization research at Deutsche Bank AG in New York, and Laurie Goodman, the New York-based senior managing director at Amherst Securities Group.

Principal Reductions

In its current version, HAMP lowers mortgage payments to about a third of borrowers’ income by reducing interest, lengthening repayment terms and deferring principal repayments.

“If the other measures in HAMP aren’t working, the government will have to look at principal reductions,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts.

In addition to modifications, the government’s Making Home Affordable program was responsible for refinancing 3.8 million loans in the portfolios of government-run Fannie Mae and Freddie Mac. The program, known among mortgage brokers as Obama refis, allows borrows who have balances higher than their home’s value to renew their loans at lower rates.

One in Four

One in four U.S. homeowners holds a mortgage with a balance higher than the property’s value. The number of borrowers with so-called negative equity reached 10.7 million, or 23 percent, at the end of the third quarter, according to a Nov. 24 report by First American CoreLogic, a Santa Ana, California-based real estate research firm. Government programs to help underwater borrowers exclude jumbo mortgages that aren’t eligible to be purchased by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia.

The government spent $230 billion to support HAMP and other housing programs in the 12 months ended Sept. 30, according to the Congressional Budget Office in Washington. The Federal Reserve has pledged to spend $1.25 trillion buying mortgage- backed securities in an effort to reduce fixed-mortgage rates. That program is set to end this quarter.

The 30-year mortgage rate dropped to an all-time low of 4.71 percent during the first week of December, according to Freddie Mac. It was at 4.98 percent in the week ended yesterday.

The Federal Reserve said Jan. 27 it will keep the target rate for overnight bank lending near zero to help nurture the recovery.

“Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said this week in a statement.

Dropped Reference

The statement dropped the previous reference to real estate that said housing “has shown some signs of improvement.”

National home prices rose 1.5 percent last month from a year earlier, the first annual gain since August 2007, the Chicago-based National Association of Realtors said Jan. 25. The median price fell 12 percent in 2009 to $173,500, compared with a 9.5 percent drop in 2008, NAR data show.

While the tax credit spurred a 4.9 percent rise in home resales last year, the first annual gain since 2005, sales of existing homes in December slumped 17 percent, the biggest drop on record. The tax benefit originally scheduled to expire Nov. 30 was extended into 2010 and expanded to all buyers by a bill Obama signed on Nov. 6. The extension gives buyers until April 30 to have a signed contract on a home, and until July 1 to close on it.

New-Home Sales

Purchases of new homes fell 7.6 percent to an annual pace of 342,000 in December, the fourth drop in the past five months, the Commerce Department said Jan. 27 in Washington. Sales declined 23 percent to 374,000 in 2009, the lowest level since records began in 1963.

The median price of a new house fell 3.6 percent from the year-earlier month to $221,300, the agency said.

Currently, 6.5 million households are either in default or at least one payment behind on their mortgages, according to the Center for Responsible Lending based in Durham, North Carolina.

If enough of those are seized by lenders, it could lead to a “double-dip recession or at least to a slower recovery,” said Julia Gordon, senior public policy counsel for the research and policy group, in testimony before the House of Representatives Committee on Financial Services last month.

“Housing is going to have a bumpy ride this year because of foreclosures,” said Bethune, of IHS Global Insight.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: January 29, 2010 00:00 EST

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