Efforts to stall foreclosures may be iceberg waiting to sink the economy

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The Obama administration spent $85 billion to stop banks from foreclosing on mortgage holders who could no longer afford their homes after the 2008 stock market crash.

Instead of helping, the program may have just delayed the collapse of 6 million American family’s dreams of home ownership. It has also stalled the building industry and re-employment as those homes are still in the system.

There are 15 million homes in America under-water on the mortgage, meaning the home is worth less than the mortgage. Of that 6 million are estimated to be hopelessly overvalued. Their owner’s have little hope of continuing to make payments and keep their homes.

Normally when that happens, the bank or mortgage company forecloses, takes possession and the debt is written off. The former homeowner moves on with a negative credit report.

The Obama plan Making Home Affordable was supposed to put a cooling off period so home owners could re-negotiate terms to make the home affordable. The program has failed to deal with the problem. Of 6 million homes in trouble, only 3.2 million qualified and of that amount only 35,000 have had their mortgages re-negotiated.  Effectively 1% of the most dire cases are settled.

The balance of 3.2 million homes are in various stages of foreclosure. People expected help. They got stonewalled by bureaucracy at the mortgage company and Federal government. The emotional and financial toll is incalculable.  These are 6 million American families who live day to day wondering where they will sleep tomorrow, next week and next month.

Those families continue to struggle with the payments, the paperwork and the phone calls to the mortgage company hoping against hope that things will work out. Normally they would have lost their homes in 90 days. It has been almost a year since the bottom fell out.

The Obama idea was to save their credit rating; however the mortgage companies have been reporting partial, late and no payments as credit faults so the credit rating black marks have been recorded. Losing their homes is another black mark.

“From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.” NY Times

“The government has pressured mortgage companies to move faster. Still, it argues that trial modifications are themselves a considerable help.

“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”

“But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.” NY Times

One could be callous and say they got in over their heads. The reality is everyone was encouraging these people to get in over their heads. “You can’t lose on real estate,” they were told by the experts.

The bigger picture

The cost to the economy is the loans have not been written off, the house have still not cleared the market and the trouble from the real estate crash is yet to arrive.

The American market’s resiliency has been partly due to the willingness to put sick deals down. Businesses and individuals cut their losses in the US and declare bankruptcy. It cleans up the dead wood and people move on.

Delaying the downward price adjustment of inflated real estate properties is delaying the inevitable hit to the economy. All the talk about recovery is based on a stock market recovery. There is no recovery of jobs, consumer demand or production because the economic pill hasn’t been swallowed.

The banks have been bailed out. The stock market is being bailed out. No one is bailing out the average American. No wonder people are losing their patience.

From a story in Slate and NY Times.