Friday, November 27, 2009

Mortgage woes and the economy

From the 30 November 2009 Greater Niagara Newspapers

By Bob Confer

There were a number of factors that contributed to the cause of the Great Recession and none were more significant than the initial round of foreclosures that began in earnest in 2006 and hit their peak in 2008. Those mortgage defaults occurred primarily in California, Nevada, Arizona and Florida where people speculated on primary residences or vacation homes that were way out of their income bracket. A few years into their payments - upon discovering that adjustable-rate mortgages really weren’t in their best interest - they found themselves unable to hold up their end of the bargain, leaving the banks and financial institutions (that were foolish enough to issue and/or buy the incredibly risky loans) with nothing to show for it. Because of that, the financial markets collapsed.

Both parties – the homebuyers and the financiers – were at fault for the lunacy that brought our economy to a standstill. The unfortunate thing is many millions more Americans were affected by the housing gamble. The resulting financial tension and anxiety found in workplaces, state houses and households the nation over, something not seen in such magnitude since the 1930s, has decreased our country’s economic output and caused the job market to spiral out of control.

Those job losses are having a major impact on the progress of recovery and mortgages are, once again, taking a huge hit. Yet, this time, it’s not the homeowners with not-so-humble abodes worth five to ten times their annual income who are losing their homes; it’s those whose mortgages really did make sense and were legitimate investments on behalf of the buyer and the lending institution. It’s the hardworking and fiscally responsible individual who’s unable to pay the bills now, the victim of unfortunate circumstance induced by the personal and corporate greed of others.

This trend began slowly in early 2008 when the recession took off and is now, rather frighteningly, gaining steam. Across the United States, in locales previously unaffected, hundreds of thousands of families are losing their homes or very close to joining the ranks of those who have. Currently, 3.4 percent of all US households (almost 2 million homeowners) are four months or more overdue on their payments. That’s more than double the number of 1 year ago.

Realize, though, that last year’s statistic was made up mostly of the oversized mortgages out West. With those homes mostly out of the picture the new, and higher, statistic represents the run-of-the-mill mortgage. With underemployment and unemployment a combined 17.5 percent, the number of 120-day-plus delinquent homes will rise even more and early indicators show that: 12.4 percent of all households are one month past due, over 4 percentage points more than there were in the third quarter of 2008.

Based on those numbers, and following the trend set by the corrupted mortgages, the “good mortgages” that will reach foreclosure status could easily total - and even exceed - 7 million over the next 2 years considering that 2008’s foreclosure filings (during a slightly stronger economy) were in excess of 3 million.

One can legitimately assume that with no end in sight to the job market woes, this is a very real possibility. As more people become jobless and families go from two-income to one or no income, hard choices must be made on a routine basis. If a breadwinner must choose between feeding his family or paying the mortgage the kids will take precedence over the lender.

While those families worry about their future, and rightly so, those who remain unaffected should think about their future as well, for it’s all interrelated. The pending glut of foreclosures is setting-up the economy for a double-dip, a recession-within-a-recession, if you will. The defaults of 2006 to 2008 caused the financial markets to fail. The defaults of 2009 to 2011 will do the same. If timing holds true to the first round, Wall Street will be reeling quite badly come late 2010 or very early 2011, pushing it, the stock markets and, subsequently, our weakened economy off a cliff.

That disaster will be a repeat of the last four and a half months of 2008, except this one won’t be so easily fixed with our national resources already having been exercised. This will represent a valley – and a deep one at that - amongst many peaks and valleys that will become commonplace in our country’s very, very long road to economic recovery.

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