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Is There Help To Avoid Foreclosure Comming?
Wednesday, January 21, 2009
December filings of foreclosure notices jumped to 303,000, an increase of 17 percent from November and 41 percent from December of 2007, according to RealtyTrac. The jump indicates that the slightly lower rate of foreclosure activity reported in the prior three months was largely due to laws put in place in California and other states that delay the foreclosure process. Now that these laws have been in force for several months, foreclosures that were in the pipeline in September and October are finally being carried through.
In California, a law requiring that homeowners be given written notice at least 30 days prior to the origination of foreclosure proceedings led to more than a 50 percent reduction of Notice of Default in filings between August and September. However, filings jumped by 122 percent in December, returning almost to the August rate. While this law in California ? and similar laws elsewhere ? may have slowed the foreclosure process, it seems that they have done little to change the basic trend.
The rate of foreclosure in December also indicates that the various efforts at mitigation are still having only a limited effect. It is especially striking that this jump occurred in December, given that there were several initiatives announced by major lenders to delay foreclosure proceedings until after the holiday season.
There is little change in the distribution of foreclosures, with Nevada, Arizona, Florida, and California being the hardest hit states. Foreclosure rates are also rising in Washington State and Oregon, as the bubbles in the Seattle and Portland markets are now starting to deflate also. Michigan and Ohio also have relatively high foreclosure rates driven by the weakness of their economies. With unemployment and underemployment rising rapidly, and house prices continuing to drop almost everywhere, foreclosure rates are almost certain to rise in 2009, in the absence of substantial measures by the government.
While Congress and policymakers are debating various plans for slowing foreclosures, it is remarkable the discussion is largely proceeding as though the housing bubble does not exist. The determination to ignore reality in the housing market will virtually guarantee more policy mistakes causing further harm to both homeowners and taxpayers.
If a plan similar to Hope for Homeowners, passed by Congress last summer, had been in widespread use a year ago, it would have left most of the homeowners in the bubble markets again underwater (even after being issued a new mortgage) and placed taxpayers in a situation where they would face substantial liability. For example, in the last year, house prices for the bottom third of homes in Los Angeles have fallen by 38.8 percent. The cutoff price for homes in this tier is now $345,000.
Suppose that last year the government had guaranteed a $315,000 mortgage on a home in Los Angeles that was appraised at the time at $350,000. This would have left the homeowner with $35,000 in equity at the time, but given the sharp price decline over the last year, this homeowner would currently be more than $100,000 underwater. They would face a strong temptation to default a second time, since this homeowner would have almost no hope of ever accumulating equity and could almost certainly rent a comparable unit at far lower cost. The resulting default would leave taxpayers liable to make good on the guarantee at a cost that could well be $150,000, after all the expenses are included.
There have been similarly sharp price declines in numerous other bubble markets. In bubble markets that have not yet deflated, programs like Hope for Homeowners are likely to be very costly to taxpayers and provide little benefit to the homeowners they are supposed to help.
It would be easy to design these programs to be more effective simply by tying mortgages to rents, since rents never got out of line with market fundamentals. If new mortgages were issued at a multiple of 15 times annual rent (which could be modestly adjusted for city-specific conditions that have led to long-term divergences from this national average) the problem of guaranteeing a new mortgage at a bubble-inflated price would be eliminated.
By Dean Baker