Even in the best of times foreclosure is a financially traumatic event. And these are definitely not the best of times. Yet you wouldn’t know that by watching the financial cable shows. In that corner of the world, everything has miraculously improved and their solution to foreclosure is to simply ignore it. Those Alt-A and option ARMs lingering around festering a rotten mess in California, just pretend they aren’t there. Banks are in many cases even ignoring missed payments on homes and not preceding with foreclosure. So they are helping with HAMP right? Not really. Consider it a form of bailout inertia. Yet somehow those in the tiny realm of the world that ignore economic reality somehow now think that by doing nothing they are now solving the crisis. In fact, mark-to-market, that absurd notion that you don’t need to value assets at their current worth is somehow permeating through the entire housing market.
If banks had to value assets at their current worth, the entire banking system would become insolvent overnight. So they choose to purposefully ignore the reality on the ground. And for those that think things have improved let me present to you exhibit A, California notice of defaults for the last few years:
Last year, as in the year that saw the stock market rally with the momentum of a bull stampede, California witnessed the largest number of notice of default filings ever. Worst year ever. California had 450,000+ notice of defaults filed in a year that supposedly saw recovery. Now this data does reflect the new world order where banks choose to ignore bad data and pretend Alt-A and option ARMs turning into platinum bars. How bad is this?
1,232 people per day in 2009 received a notification of default because they missed at least 3 mortgage payments in California.
Now this doesn’t seem like a healthy market in my book. In fact, last year saw nearly a record amount of actual foreclosures, closely resembling 2008:
Now just look at 2006. We went from nearly no foreclosures to quickly approaching 250,000 in 2008 and 2009. In other words, the market is horribly unhealthy. As in today. When I look at the California budget and our 12.4 percent unemployment rate it should be apparent that no housing market can boom when the real economy is floundering. Can we sell homes in the short-term? Of course. Can we get people into homes with low interest rates and tiny down payments? Absolutely. But did we not learn with the Alt-A and option ARM fiasco that getting people into a mortgage is only half the battle? Ideally you want people to have the ability to service the mortgage for years to come, not only for a short period of time.
And that is largely where the California housing market has gone off track once again. I was listening to the radio and heard a mortgage broker empathically say, “we need to get mortgage rates back to the low 4% range to get housing going again!” I think globally we are far beyond ever seeing those ridiculous rates. The average 30 year mortgage rate for the past 40 years is 9 percent and a rate at that level would cause housing to come to screeching halt. A rate that was fine for many years and when households earned less income is now somehow unpalatable. It is hard to envision because our economy is running on the exhausted fumes of debt. Just think about every program we have done to keep housing propped up:
-The Federal Reserve buying $1.25 trillion in mortgage backed securities to keep rates artificially low (coming to an end)
-The home buyer’s tax credit (isn’t too much home buying what got us into this mess?)
-Massive taxpayer subsidies on interest rate deductions (why penalize those who choose to rent?)
-Foreclosure delays – HAMP and statewide moratoriums (refer to charts above to show success rate)
-Banks stalling and massive build up of shadow inventory (the new mark to market stalling tactic)
And after all of the above, foreclosures are still raging and homeowners are still unable to make their payments. Just look at the trend:
California tried a foreclosure moratorium in 2008 and look what that did. Once that program was over the can was punted into Q1 of 2009 where HAMP was there to pick up the slack. Even with that, notice of defaults were still rising because of an unemployment rate of 12.4 percent. If you can’t pay your mortgage does it matter that your payment is $2,000 instead of $4,000? Many families and individuals are simply unable to pay their debt. There isn’t any gimmick to fix that. The only remedy to that is something called a job. Is our financial system so twisted that we think of jobs only after every measure above has been exhausted to create a transfer of wealth to Wall Street?
And if we look at the top defaults in Q4 of 2009 we find a list of very familiar names:
Names that will go down in infamy and will always be associated to the housing bubble are still causing problems today. The subprime and option ARM crusaders. They have littered California with these surprises and we know they are going off. Just look at those notice of defaults. You don’t get a notice of default for paying your mortgage on time. Yet the amount of foreclosures on the market does not even reflect what the NOD data is projecting. Banks are merely holding off the debt and pretending all will be well. But employment is still in the trough of this cycle. What industries are hiring large numbers of people? Or what industries are paying people enough for some of those inflated neighborhoods? No wonder why FHA insured loans with a 3.5 percent down payment are now the rage in California and all across the country.
Now think of this. Of the 5,290,000+ homes with a mortgage in California 35 percent are underwater. 1,850,000+ homes are in a negative equity position. Walking away is now picking up steam because why would you continue making the payment on a home that is now so severely underwater? To keep the bank current? And the bulk of people not paying, those 450,000 NODs in 2009 got that way because of the economy.
Now if home sales were booming because jobs were coming back and our real economy was growing then I can understand the trend to a certain degree. But if home sales are only going up because of gimmicks then we know this story all too well since we just lived it a few years ago. Hard to believe we are creating housing bubble 2.0 but this time, we may not have the same inflating power as we did in the last run.
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