Foreclosures

There is a chance that we may see an increase in employment when the data comes out for December. However, it is not going to result in all the unemployed people going back to work all at once. Still, if you like to look at trends it is very hard to dispute a positive one in the ratio of firings to hiring and if it continues we will start to see a slow reduction in unemployment.

One of the problems in trying to determine how the economy is doing is the fact that each of us is really our own individual economy. You have a job or a business and regular income or you don't. You can afford your mortgage payments or you can't. The sum of all the various individuals is simply an accumulation of all these individual situations and while it is necessary to look at it that way it can be very deceptive.

For example, we saw a trend where some homeowners who saw the value of their homes go underwater simply walked away from them. Now, remember that during the boom, there were two categories of home buyers that were created that are not normally representative of most American homeowners. These are the flippers and the unqualified.

It became popular for some people who believed that housing would simply continue to appreciate in value to buy houses on spec with the intent of getting rid of them at a profit. It got so bad in some states (coincidentally the ones that had the biggest problems later) that people would line up and compete to put deposits down on condos and homes under development hoping to transfer those rights before ever actually occupying those homes. Now when the real estate bubble burst, these people had no real financial or personal investment in these homes and found it very easy to walk away. There was no real emotional attachment and as real estate plunged they walked and they walked early. However, most homeowners do not fall into this category and have strong emotional attachments to their homes. They go into foreclosure because they really can't make the payments, not because they see it as financially desirable.

The other group were the unqualified, meaning people who got zero interest or negative equity mortgages when they really didn't have enough financial assets to justify the prices they were paying. Of course they were also hoping for price appreciation and further for personal advancement in their jobs before the payments increased. When this didn't happen, they were forced out, since really they had no way to refinance or to make the payments in most cases.

So this created a significant short term trend. However, I would argue that while there may still be some people who fall into these categories waiting for the shoe to drop, so to speak, by this time most have been driven out. This leaves homeowners who really want to keep their homes. The fact that some of them have missed a payment because they wanted to have a good holiday season or because other bills came due, does not mean they have decided to walk away. Yes some will end up being forced into foreclosure, unfortunately, but not because they decided to walk away from an underwater mortgage situation, but because their individual situation just didn't give them any other option.

My point is that with the two groups who walked away easily greatly diminished, the trends calculated based on their behavior is simply misleading. Most homeowners will do everything they can to avoid foreclosure. Some of them will go into foreclosure, but most will find a way to avoid it. It isn't just economics to them.

Foreclosures

One thing about economics is that when an asset gets cheap, someone will figure out how to utilize it to make money. If you consider our current housing situation, we see an excess of housing in certain parts of the country because of overbuilding. This has caused housing prices to decrease to the point that speculators are starting to buy them with the hope of future profits.

Now, if you simply put together some charts in a room, the economics of housing in certain areas simply don't look good. We continue to have high unemployment and excess housing, meaning that folks losing their jobs can't sell their houses and end up in foreclosure. Of course, we are starting to hear about some speculative initiatives that may easily impact this.

The simplest solution for banks and perhaps the Government would be to find a way to allow the current occupants to stay in these homes until economic conditions improve. Clearly, it is in no ones interest to foreclose on a house when there is no market for it. It would seem that a program that reduced payments for a period of time, with potential additional losses underwritten by the Government could go a long way to reducing foreclosures and potentially cost the taxpayers relatively little.

For example, suppose there is a family in a house with a payment of $3,000 a month. Now, perhaps the payment has recently adjusted, or one of the owners has lost their job recently and they cannot make this payment. If we assume that the cost of the foreclosure is $20,000 for legal fees and if the house's value in the marketplace is below the value on the bank's book, foreclosing on this house will be an expensive proposition. However, the bank's rules do not allow them to refinance the house since it possibly does not have enough value for the amount owed and the occupant's do not have enough income.

I would argue, that assuming the economy will recover and the occupant's will become employed again, that the bank's work out a payment that allows small payments to be made for a year. I think as part of the stimulus the payments should be backed up by the Government and the bank at the end of the year should be no worse off than they would be today. Effectively, this would mean that the bank would put a gap into the current mortgage and suspend it for a year. During that year interest would accrue up to the point that the payments made did not cover the interest on the mortgage. At the end of the year, the mortgage would either resume or if the situation had not improved, foreclosure would proceed. The increase in the book value of the asset, related to the fact that negative amortization had taken place for the year would be guaranteed under the stimulus plan. So if the bank asset per the mortgage at the beginning of the year had been 400,000 and because of negative amortization it was now 430,000, the Government would reimburse the bank the portion of the 30,000 not recovered in the sale of the asset. So if after foreclosure it sold for 300,000 the bank loss would still be 100,000.

Now, to qualify for a program like this, certain conditions would have to be met and the closer the occupant could come to paying the full interest costs, the less the potential cost to the Government. Also, every foreclosure avoided this way would save the banks a significant amount.

Just thoughts.