Zandi: Rising Foreclosures Present Challenges Ahead
Rising Foreclosures Could Doom Recovery
By Mark Zandi in West Chester
June 1, 2009
Obama needs a Plan B to arrest foreclosures - or else
By Mark Zandi
Monday, June 1st 2009, 11:05 AM
(Page 1 of 2)
Despite encouraging signs that the worst of the financial panic and economic downturn are over, the coast is far from clear. The key threat is the still mounting foreclosure crisis, which appears set to overwhelm the Obama Administration's plan to stem it. The administration's economic successes, including the fiscal stimulus and bank stress tests, will be for naught unless foreclosures soon decline.
If something doesn't change soon, mortgage loan defaults - the first step in the foreclosure process - are on track to total an astonishing 4 million this year, representing nearly one in 12 first mortgages. Foreclosures are certain to soar higher this summer, because foreclosure moratoriums imposed late last year by various states, Fannie Mae and Freddie Mac, and mortgage servicers have now expired.
Most homeowners in foreclosure will lose their homes. Since foreclosed property is dumped on the housing market at a steep discount, foreclosures drive down everyone's home values and thus their wealth. Some $6 trillion in homeowners' equity has been wiped out since house prices peaked three years ago. Households that find themselves suddenly less wealthy make for very nervous spenders.
Foreclosures also ratchet up the pressure on the hard-pressed financial institutions that own the mortgage loans and securities. Losses on all the subprime, alt-A and jumbo loans made during the housing boom will easily top $1 trillion, nearly equal to the amount of capital underpinning the U.S. banking system. Prime borrowers are also defaulting with increasing regularity. Banks are again able to raise capital, but until these losses abate, even healthy banks will remain reluctant to extend credit, even to creditworthy borrowers.
It is vital to understand that foreclosures beget more foreclosures. As foreclosure sales drive down house prices, more and more homeowners are pushed under water - that is, their homes are worth less than what is owed on them. At last count, 15.4 million homeowners - about one in five of those with first mortgages - were in such a predicament, putting them at grave risk of defaulting if anything else were to go wrong in their financial lives.
The administration's plan to short-circuit this self-reinforcing negative foreclosure cycle is off to a painfully slow start...
Read more: http://www.nydailynews.com/opinions/2009/06/01/2009-06-01_obama_needs_a_plan_b_to_arrest_foreclosures__or_else.html?page=0#ixzz0HDjeQc4O&B
By Mark Zandi in West Chester
June 1, 2009
Obama needs a Plan B to arrest foreclosures - or else
By Mark Zandi
Monday, June 1st 2009, 11:05 AM
(Page 1 of 2)
Despite encouraging signs that the worst of the financial panic and economic downturn are over, the coast is far from clear. The key threat is the still mounting foreclosure crisis, which appears set to overwhelm the Obama Administration's plan to stem it. The administration's economic successes, including the fiscal stimulus and bank stress tests, will be for naught unless foreclosures soon decline.
If something doesn't change soon, mortgage loan defaults - the first step in the foreclosure process - are on track to total an astonishing 4 million this year, representing nearly one in 12 first mortgages. Foreclosures are certain to soar higher this summer, because foreclosure moratoriums imposed late last year by various states, Fannie Mae and Freddie Mac, and mortgage servicers have now expired.
Most homeowners in foreclosure will lose their homes. Since foreclosed property is dumped on the housing market at a steep discount, foreclosures drive down everyone's home values and thus their wealth. Some $6 trillion in homeowners' equity has been wiped out since house prices peaked three years ago. Households that find themselves suddenly less wealthy make for very nervous spenders.
Foreclosures also ratchet up the pressure on the hard-pressed financial institutions that own the mortgage loans and securities. Losses on all the subprime, alt-A and jumbo loans made during the housing boom will easily top $1 trillion, nearly equal to the amount of capital underpinning the U.S. banking system. Prime borrowers are also defaulting with increasing regularity. Banks are again able to raise capital, but until these losses abate, even healthy banks will remain reluctant to extend credit, even to creditworthy borrowers.
It is vital to understand that foreclosures beget more foreclosures. As foreclosure sales drive down house prices, more and more homeowners are pushed under water - that is, their homes are worth less than what is owed on them. At last count, 15.4 million homeowners - about one in five of those with first mortgages - were in such a predicament, putting them at grave risk of defaulting if anything else were to go wrong in their financial lives.
The administration's plan to short-circuit this self-reinforcing negative foreclosure cycle is off to a painfully slow start...
Read more: http://www.nydailynews.com/opinions/2009/06/01/2009-06-01_obama_needs_a_plan_b_to_arrest_foreclosures__or_else.html?page=0#ixzz0HDjeQc4O&B