One of the criticisms of the Obama administration is that they have not paid enough attention to the economic recovery of American families. One measure of the pain felt by families is the threats to their homes. With unemployment still in the 9% range many families are finding that they can no longer afford their mortgages. Despite record low mortgage rates, families can’t find a way to access the low rates because the value of their homes have decreased, and they now owe more than the property is worth.
Mortgage lenders look at three main things when deciding to make a mortgage: Is the collateral sufficient to cover the loan plus any foreclosure costs plus the carrying cost of the home until there is a sale; Does the borrower have enough income to pay the cost of the mortgage plus all other debt plus living expenses; Does the borrower have a history of paying all debts on time. High unemployment and decreasing home values makes it impossible for many Americans to positively answer each of these questions.
I’m one example. While I used to have a six figure income, I am now living on one fourth of that thanks to Social Security and a small pension from Wells Fargo Bank. I have a little in savings, but my savings have been dwindling as I paid off all debt, other than my mortgage, when I retired. Property values in Grand Junction have declined. I’m not yet underwater, but if values decline much more I will be. (Crazy me, I’m actually thinking about making improvements to my home, while many people have decided to simply walk away from houses when they owe more than the value of the property.) I have an excellent credit rating, but still no bank is going to refinance my mortgage at a lower interest rate because the collateral value doesn’t meet their criteria.
Bloomberg is reporting that foreclosure filings are down because banks are delaying processing defaults. This is both a good news and a bad news story. If banks are sitting on foreclosures, it is because they can no longer afford the carrying costs of the properties they have already foreclosed upon. When a bank forecloses, they become responsible for the maintenance of the property, including things like managing weeds in compliance with county noxious weed laws. They must pay property taxes. They need to send someone around frequently to make sure that the property they own is not deteriorating. The longer it takes to sell the property, the more these expenses mount up. The more the expenses mount up, the less likely that a bank is willing to assume more of them. The good news is that the defaulted homeowner still has a place to live, if the bank does not go through a foreclosure. The bad news is that they will eventually lose their home.
So long as banks have large numbers of defaulted loans, with foreclosures looming, the real estate market is not likely to recover. New homes will not be built, so all those guys who used to work building things will be running out of unemployment benefits, and the downward cycle continues.
Normally I am an optimist (witness my continued investment in an almost underwater property), but I can’t see much of an economic recovery anytime soon. We need to put Americans back to work.
Homework
Bloomberg Article About Bank Forclosures
Snapshot of Grand Junction Housing Market
Mortgage lenders look at three main things when deciding to make a mortgage: Is the collateral sufficient to cover the loan plus any foreclosure costs plus the carrying cost of the home until there is a sale; Does the borrower have enough income to pay the cost of the mortgage plus all other debt plus living expenses; Does the borrower have a history of paying all debts on time. High unemployment and decreasing home values makes it impossible for many Americans to positively answer each of these questions.
I’m one example. While I used to have a six figure income, I am now living on one fourth of that thanks to Social Security and a small pension from Wells Fargo Bank. I have a little in savings, but my savings have been dwindling as I paid off all debt, other than my mortgage, when I retired. Property values in Grand Junction have declined. I’m not yet underwater, but if values decline much more I will be. (Crazy me, I’m actually thinking about making improvements to my home, while many people have decided to simply walk away from houses when they owe more than the value of the property.) I have an excellent credit rating, but still no bank is going to refinance my mortgage at a lower interest rate because the collateral value doesn’t meet their criteria.
Bloomberg is reporting that foreclosure filings are down because banks are delaying processing defaults. This is both a good news and a bad news story. If banks are sitting on foreclosures, it is because they can no longer afford the carrying costs of the properties they have already foreclosed upon. When a bank forecloses, they become responsible for the maintenance of the property, including things like managing weeds in compliance with county noxious weed laws. They must pay property taxes. They need to send someone around frequently to make sure that the property they own is not deteriorating. The longer it takes to sell the property, the more these expenses mount up. The more the expenses mount up, the less likely that a bank is willing to assume more of them. The good news is that the defaulted homeowner still has a place to live, if the bank does not go through a foreclosure. The bad news is that they will eventually lose their home.
So long as banks have large numbers of defaulted loans, with foreclosures looming, the real estate market is not likely to recover. New homes will not be built, so all those guys who used to work building things will be running out of unemployment benefits, and the downward cycle continues.
Normally I am an optimist (witness my continued investment in an almost underwater property), but I can’t see much of an economic recovery anytime soon. We need to put Americans back to work.
Homework
Bloomberg Article About Bank Forclosures
Snapshot of Grand Junction Housing Market
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