Foreclosure and Real Estate Blogs

Well, tomorrow’s the big day.  The Fed is going to be cutting the federal funds rate, the only question seems to be will they drop .50%, .75% or possibly a full percentage point.  These are certainly interesting times for rate watchers.  The Federal funds rate doesn’t have much impact on mortgage rates, but it does have impact on other parts of the economy and that’s where the Fed wants to provide some stimulation.

What happens, though, when the Fed exhausts it’s ability to drop rates to provide economic stimulus?  A full percentage point drop will put the federal funds rate at 2% and according to the government, we aren’t even in a recession.  If this non-recessionary economy continues to worsen, that leaves the Fed with only 2% for future adjustments.  Is that going to be enough?  Who knows.

A lot of the U.S. economy is driven by consumer spending.  With the home equity ATM closed, it’s highly unlikely the U.S. economy will be able to spring back quickly no matter what changes the Fed brings about.  2010 is a good possibility for the end of this non-recession, but I also wouldn’t be surprised if it went so long as 2011 or 2012.  Just make sure anything you buy either cash flows or is at a very significant discount or you’re willing to keep it for awhile.

“The mounting crisis has forced Mr. Bernanke, a former professor of economics, to discard the sanguine view of the nation’s economic health that he expressed last summer. He has also abandoned his skepticism about the need to calm financial markets and set aside his concerns about the “moral hazard” of bailing out big financial institutions.”
From the NY Times

Why is gold rising in price?  Gold is a classic hedge against inflation.  Why are people concerned about inflation?  Because the Fed keeps cutting interest rates to stave off recession.  Why is there a threat of recession?  Because the Fed allowed Wall Street to binge on crappy mortgage lending practices.

The party’s over, so now who gets to support the big Wall Street failures?  The taxpayers.

I’ve seen this published in several places, it seems like a growing trend due to the increase in distressed homeowners.

“Many homeowners facing financial difficulties used to look to home equity as a resource to cover shortfalls. But with that option off the table for many, increasing numbers of people are considering tapping into a second large asset — retirement savings.”
From SeattlePI.com

There’s a saying about the inadvisability of throwing good money after bad, it’s pretty appropriate in this situation.  401k’s are a retirement vehicle, and there are significant penalties for early withdrawals, even in a hardship situation.  You can often borrow against the 401k, but should you?
If a foreclosure process is imminent, the borrower really needs to take a strong look at their finances, the property and their loan(s), and the real estate market in their area.  If there isn’t enough money coming into the household to be able to make the payments, foreclosure is inevitable.  If a job loss caused the default, is the expectation of new employment realistic, or is it just hope?  The use of retirement money to buy a few more months probably isn’t the wisest choice in this type of situation.  On the other hand, if there was a financial setback that has since been resolved, then the thing to do is talk to the lender about a forbearance plan.  It’s a much cheaper solution than using retirements funds.

If there’s been a financial setback, and the local real estate market has dropped in value, there is no point in using retirement funds to stave off foreclosure.  It will take years for many markets to recover some of the losses, buying a few months more time with 401k funds probably won’t get enough time to allow for market recovery.

Hard choices, but retirement funds should be left for retirement, using them to delay foreclosure for some time period really does fit the “good money after bad” concept you should be avoiding.

“Mortgage delinquency and foreclosure rates have increased substantially over the past year and a half,” Mr. Bernanke said during a speech in Washington. “Behind these disturbing statistics are families facing personal and financial hardship and neighborhoods that may be destabilized by clusters of foreclosures.”
From the NY Times

Well, duh.

Of more interest is the comment that 1.5 million homes entered foreclosure last year and there are another 1.5 million subprime loans that will have their rates reset this year.  There’s a lot more pain to come, and not just for homeowners.  Bear Stearns, one of the big players in the subprime mortgage market is now looking for a bailout from JPMorgan.

When this is all over, and I guarantee the Fed won’t be the architect of it’s resolution, many homeowners might be battered, but they’ll carry on.  Some of the big lenders that facilitated the credit bubble won’t be carrying on, they’ll be absorbed or shut down, which is the way things should be.

“The Commerce Department said yesterday that retail sales fell 0.6% in February; sales excluding the volatile auto and auto-parts categories fell 0.2%. The declines reflect a sharp slowdown in consumer spending, which accounts for more than 70% of U.S. economic activity, as Americans grapple with high gasoline and food costs and declines in home values and other asset prices.”
From the Wall St. Journal

Interesting points from the article include some pretty pessimistic viewpoints from the surveyed economists with a majority believing federal funds will be used to help alleviate an unsteady economy.  Some elements of humor include one economist stating that these economic issues came to be under Ben Bernanke’s watch.  Bernanke might have to take the heat, but that’s just because Greenspan retired knowing what was coming.