Economy on verge of new foreclosure crisis

Signaling continued economic distress, Deutsche Bank estimated today that over 50 percent of mortgage holders may owe more than their homes are worth. Already 25 percent of mortgages are now “underwater.”  “The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011,” Bloomberg News reported. 

Already, one million homes have been foreclosed since the beginning of the year. Continuing high rates of unemployment are expected to drive foreclosures further. In this regard Bloomberg reported: “As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the securitization analysts said.” 

Adding to the economic woe is the potential for a new wave of defaults on option adjustable rate (ARM) mortgages, valued at over $230 billion. ARM loans permit holders to pay less than the monthly amount owed with the with difference tacked on to size of the loan.

A surge in defaults on these loans was expected earlier in the year. “Many experts had expected an explosion of defaults in the springtime on these roughly 564,000 outstanding mortgages. However, interest rates dropped to historic lows, and that delayed the detonation of what many housing analysts still see as a ticking time bomb,” reported KLA.com.   

The storm may be delayed but is hardly over, KLA.com continued.  
 
'They're probably going to default at a rate that makes subprime look like a walk in the park,' warned Rick Sharga, senior vice president for RealtyTrac, a foreclosure research firm in Irvine, Calif. 

A rise in defaults could jeopardize ongoing efforts to jump start the economy, already at risk because of the refusal of the banking industry to renegotiate troubled loans an issue addressed by Rep. Barney Frank, D-Mass., recently.  

Frank, head of the House Committee on Financial Services, criticized the big banks for their slowness in renegotiating loans, putting profits before people. Banks say that allowing loans to default more profitable than changing loan terms. Frank responded sharply, saying in a statement that his committee would not support the industry's legislative agenda until lenders do far more to modify troubled mortgage loans. 

As a result of bankers balking at the Obama administration requests, only nine percent of troubled loans have been refinanced. In response to this situation, Frank said: “I can assure all concerned that no legislation which we are asked to pass to facilitate the full return of the lending industry to the role it should be playing in the economy will pass out of the Financial Services Committee unless we see a significant increase in mortgage modifications and foreclosure-avoidance, or the legislation includes a bankruptcy provision for primary residences.”