Economists are predicting that a coming wave of commercial real estate defaults will be the next problem facing the US economy. From imarketnews.com:
The coming wave of commercial real estate loan defaults will likely limit the flow of credit to small businesses and extend the “jobless recovery,” an economist with Grubb & Ellis Co told Market News International.
Bob Bach, chief economist for the firm, said, “The backlog of distressed loans is actually probably hindering the flow of credit to small business in this country and thus could serve to prolong the jobless recovery.”
From HuffPo: The Congressional Oversight Panel, the TARP watchdog group headed by Elizabeth Warren issued a report this week on the looming commercial real estate crisis:
Over the next five years, about $1.4 trillion in commercial real estate loans will reach the end of their terms and require new financing. Nearly half are “underwater,” meaning the borrower owes more than the property is worth. Commercial property values have fallen more than 40 percent nationally since their 2007 peak. Vacancy rates are up and rents are down, further driving down the value of these properties.
When the reckoning comes, it could threaten everyone from banks and pension funds to renters and small businesses — and small banks could be particularly vulnerable.
Warren warned against government inaction.
“When commercial properties fail, the result is a downward spiral of economic contraction; job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities,” she said. “These are the same small banks that provide loans to the small businesses that create jobs and boost productivity. If hundreds more community banks go under the effect could be to dump sand in the gears of our economic recovery.
The whole report can be found at the panel’s website, which offers this warning:
The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.
Elizabeth Warren is one of the strongest and sanest voices we have right now on the subject of the US economy. Let’s hope Washington is listening – because as we’ve learned, it’s easier to be proactive than it is to deal with cleaning up after the fact.
Tags: foreclosures
Last week we reported that while the number of home foreclosures in 2009 would likely set a new record for the second consecutive year, analysts say the wave of foreclosures won’t peak until 2011.
The next day the Wall Street Journal reported that one-quarter of U.S. homeowners are “underwater”, meaning they owe more on their mortgages than their homes are worth.
Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.
These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.
Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.
About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale.
This week the Administration responded with a well-intentioned effort to push mortgage lenders to convert more trial loan modifications into permanent reductions under the existing Making Home Affordable program. That program has been hobbled from the outset. The banking lobby succeeded in removing viable mandatory requirements in the legislation, defeated the “cramdown” provisions for court-ordered mortgage reductions, and substituted a more voluntary approach where lenders are offered TARP incentive payments.
Apparently the banks have not been very impressed with the size of those TARP incentives, having only converted a tiny fraction of trial modifications into permanent mortgage reductions.
“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”
Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments.
Reporting on Treasury’s latest effort to pressure mortgage firms The New York Times also included a graphic listing where top banks stand so far on making mortgage reductions permanent.
The Treasury Department has blamed banks and mortgage companies, which it says have been slow to process documents, for the program’s lukewarm start. Homeowners participate in the program for up to five months on a trial basis, and if they make timely payments and provide documents proving their financial need, they are eligible for permanent reductions.
On Monday, the department said it would require lenders to submit plans outlining how they will increase the number of homeowners given permanent mortgage reductions.
If they fail to do so, the department said it would use “any and all authority” to impose fees and other sanctions. It will also publicly list the worst offenders and withhold cash incentives until reductions in mortgage payments are made permanent. In addition, the Treasury Department will appoint staff to monitor the progress of home lenders on a daily basis.
Yet despite the good intentions of those in the Administration working on the program, some homeowner advocates and policy analysts question whether a different approach is needed.
Tags: foreclosures
That assessment from Jay Brinkmann, chief economist for the Mortgage Bankers Association (MBA), noted by Laura here on Friday, came as MBA released a new survey showing mortgage delinquencies reached a record high in the third quarter of this year.
The New York Times reported:
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households. The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.
Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.
More ominous yet was this line further down in The Times story:
mortgage bankers expect foreclosures to peak in 2011
In its announcement of the survey, MBA’s Brinkmann said:
Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP. Over the last year, we have seen the ranks of the unemployed increase by about 5.5 million people, increasing the number of seriously delinquent loans by almost 2 million loans and increasing the rate of new foreclosures from 1.07 percent to 1.42 percent.
The MBA and other bank lobbying groups helped take the teeth out of the Helping Families Save Their Homes Act earlier this year by defeating the so-called “cramdown” provision in the Senate which would have allowed bankruptcy judges to order mortgage restructuring for many struggling homeowners. Bank lobbyists also succeeded in weakening the legislation by making it more difficult to get lenders to agree to mortgage modifications.
So far many who qualify for such modifications just aren’t getting them.
RealtyTrac’s Housing Predictor now has upped their forecast to 10 million foreclosures by
end of 2012:
Housing Predictor forecasts that 10 million homeowners will be foreclosed through 2012 as more mortgage holders are unable to refinance their mortgages because of falling home values or give up at the prospect of holding on to their homes all together.
The increase to 10 million foreclosures represents 2.4 million more homeowners from the 7.6 million forecast in March. These homeowners will have the dream of home ownership taken away. Until lawmakers take more severe action to halt the epidemic it is clear the housing market will not stabilize and the economy will weaken further.
Watching the Center for Responsible Lending’s National Foreclosure Ticker it looks pretty certain that 2009 will set another new record for foreclosures in a year.
According to Bloomberg a housing market recovery has been delayed:
A recovery in U.S. housing will have to wait at least until next year.
The outlook for the home market dimmed this week as residential construction and mortgage applications fell and loan delinquencies reached a record.
“I don’t think the housing crisis is over,” Mark Zandi, chief economist with Moody’s Economy.com, said in a telephone interview. “I think we’re going to see another leg down.”
Reporting on the lag in mortgage fixes, the Center for Responsible Lending says:
Last spring when Congress considered taking stronger measures to stop foreclosures, loan servicers said they could handle the problem themselves—but they’re not delivering.
CRL is urging Congress to act to ensure that current foreclosure-prevention and loan-modification efforts are as effective as possible, and to lift the ban that now prohibits home loan modifications through the courts.
Meanwhile those struggling homeowners who don’t qualify for mortgage fixes now at least have an opportunity to stay in their homes through the expanded Deed for Lease program from Fannie Mae:
Some homeowners facing foreclosure will be able to remain in their property as renters under a new program announced Thursday by Fannie Mae.
The Deed for Lease Program allows qualified homeowners to sign a lease allowing them to remain in their homes in return for agreeing to transfer ownership of the property to the lender. Rent is capped at 31 percent of the homeowner’s gross monthly income.
Leases are signed for 12 months, with the option of renewing on a month-to-month basis afterward. Freddie Mac initiated a similar program in January that allows former homeowners to stay in their homes on a month-to-month basis.
The program is based on the Right-to-Rent proposal(pdf) offered by economist Dean Baker.
Applauding Fannie Mae’s new program as “an important step forward in dealing with the housing crisis”, Baker urged it be offered for a substantially longer period, perhaps five to ten years:
This would give former homeowners real security in their homes. This longer lease period could be made contingent on timely rent payments and proper upkeep and other factors, but families should know that they have the option to remain in their home for a substantial period of time, not just a year.
Tags: foreclosures, Housing, mortgage crisis
by Kyle Morehead—Missouri
Last Friday as I was canvassing in Independence, Missouri I came across two blocks that were essentially empty. It seemed that house after house was in foreclosure or just empty. When we did make contact with a resident the majority were unemployed or scared of losing their jobs. The economic situation is dire. What we do is more than going door to door to talk about health care. We are witness to the current reality of American life.
Our job is to remind the folks that there are people like us that want to help. And, that justice still means something to us. We must share the passion with the folks.
Tags: foreclosures, the economy
by Rachelle Paynter—Colorado
I’ve been in Colorado for a month now. The people here are amazing, but one woman in particular stands out in my mind. I was canvassing in Thornton, Colorado, which is an area that has been devastated by massive amounts of foreclosures. I met a woman who had been laid off at her job recently because she made too much money and they wanted to pay someone less wages to do her job. She was really thrilled that people were out in her community doing something about the issues that hit home with her, and she joined and gave a dues payment despite the fact that she lost her job.
Tags: foreclosures, Jobs, layoffs, the economy
