Saturday, July 23, 2011

Will USS Titanic Hit Foreclosure Iceberg?

File:Stöwer Titanic.jpg

The USS Titanic is about to hit an iceberg made up of massive foreclosures that may well sink the US economy.

The sheer number of foreclosures coming in the next few years while the nation is trying to climb out of the recession is daunting.

Statistics can tell this story:

Data shows that banks own about 800,000 properties received through foreclosure.

Another million homes in the foreclosure system will become bank owned, REO properties.

Forecasts are that another two million households will lose their abodes in the next two years.

This amounts to about 3.8 million houses to be sold by banks.

The last reported rate of sales for foreclosures was about 160,000 a quarter, and this rate is down from two years ago, 350,000 a quarter.

If we take the current rate as a steady one, then it will take about 24 quarters to sell all of the inventory, that is 6 years!

So if we take the position that the foreclosure/housing problem is the main thing holding back economic resurgence, then we can expect an emergence from the recession in 2017 at a minimum – when all of the foreclosure stock is finally sold off. This is a depressing thought.

(Note that the math here assumes that the rate of purchase of foreclosures will not decline as it has over the last 2 years. It also assumes that the banks will have the staff and resources to market all of these properties. And it assumes that the banks will stage the sale of the properties to prevent a glut and price plunge. And it assumes no court delays around the issue of who owns the mortgage. The actual fact is that it is more likely that it will 7 to 9 years to clear out the inventory.)

The problem with this 6 year forecast is that the recession will do great damage to the credit standing of the nation. Ratings agencies will downgrade the federal government’s financial reputation.

We will then enter a brand new zone of the recession – “Recession Phase Two”.

In this stage Treasury bonds will be sold at much higher interest rate than today’s. they will begin approaching junk bond status. This will of course lead to higher taxes on the middle class and working class and small business. Further, it will lead to higher interest rates as investors and banks buy Treasury bonds rather than invest in industry. Also, this will increase inflation as higher interest rates will compel businesses to raise prices to pay their finance charges.

Giving banks the TARP without any requirement of loan modification was a dreadful mistake and may be the fatal error that undermines the nation’s economic future. This action created an artificial situation where the banks benefited but homeowners did not, and structured the economy recovery in a very distorted way.

Favoritism to the rich and powerful came from a highly biased and short term mentality that is elitest, selfish and undemocratic, and not to mention economically foolish.

Today millions of foreclosures are dragging down the economy, lowering house values in a long term spiral of anguish.

Forcing banks to modify loans is the only real solution. The Federal Reserve and the courts have the power to do this either through fines or government supervision over the banks’ loan portfolios.

Letting the banks run the economic recovery was and is a big mistake.

Various fiscal strategies like quantitative easing, putting cash into the economy by purchase of bonds to lower interest rates, should have worked by now.

Rising inflation is a problem but the major issue is being ignored. And arguments about the budget are only dealing with effects and not cause. Housing is a major part of an economy but few want to address the issue.

Real estate is a huge sector of the US economy.

Construction jobs are created. This stimulates hiring and purchase of materials for building. When people buy new or previously owned houses they buy new appliances, hardware, furniture and more. This creates jobs. When house values go up home equity loans spur purchases and investments. Banks become more solvent and more confident in the economy, lending more and lowering interest rates,

Housing is where the recession started, it is still the worst affected sector.

And it is in housing where the recession will begin to end.

If we ignore this fact, the USS Titanic will hit the approaching iceberg and all hands will go down -- the rich, politicians and the unaware passengers.

[statistics from RealtyTrac]

File:Shipwreck terschelling.JPG

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