Foreclosure and Real Estate Blogs

“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.

There’s been a lot written about home loans and securities lately with the emphasis on increasing foreclosure rates and the losses incurred by the holders of sub-prime securities.  That begs the question “What the hell is Fannie Mae and Freddie Mac, and why do I care?”

U.S. residential lending was far different in the fifties, rather than what we’ve got today.  Local banks, savings and loans, thrifts were all sources of financing, and although the loan terms weren’t too bad, it did require a 20% down payment to purchase a home.  Housing, and residential construction were subject to boom and bust periods often influenced by the availability of credit.

Fannie Mae was restructured in 1968 as a federally chartered corporation, Freddie Mac was created in 1970 to “compete” with Fannie Mae.  Both corporations are private, but are government sponsored and have lending advantages that aren’t available to non-sponsored lenders.  The explanation for what these organizations do isn’t hugely simple, but it is understandable.  They create CMOs or Collateralized Mortgage Obligations which entails combining a group of mortgages into a “pool”, then separating the future payments into “strips” with different risks and maturity dates.  Those strips are then sold as securities.

Many mortgage loans originated in recent times won’t be owned by a “lender”, they are originated to Fannie Mae or Freddie Mac guidelines, then sold into the secondary market.  The entity servicing(collecting payments) the loan may, or may not have an interest in the loan.

The use of CMOs in the past certainly helped stabilize housing markets and increased overall homeownership rates.  Where things went bad, IMHO, was when the demand for high returns led to the creation of CMOs for pools based on artificial or non-existent original loan documentation.  It was musical chairs with ever increasingly easy credit, the big problem being there were an awful lot of players and not too many chairs.

O.K., I’m on a media bent today.  I just looked through some foreclosure new feeds and saw reports that Vermont foreclosures are up 30% and Florida foreclosures don’t show any sign of letting up.  Duh.

I’ll venture to say that any state/region that saw huge amounts of price appreciation over the past few years is going to have a foreclosure problem for the next few years.  It’s not just a sub-prime mess, there were a ton of people that bought, not wanting to miss out on buying property while prices seemed to always go up.  Did they over-purchase, and is it possible they’ll have problems making future payments?  There’s a good percentage of people that did, and will have problems.

The last time Southern California had a major peak in property price it was right around 1990.  Prices declined from that time until about 1996.  This run-up lasted longer, and was probably more intense due to relaxed lender standards.  So, are we likely to see at least a 6 year decline, or is this going to be just a little blip?  The only thing keeping many real estate markets going right now are the buyers who didn’t buy on the rise and are finding “value” in softer prices.

Two things to keep in mind.  Prices most likely will not reach pre-runup levels.  You’ll know it’s pretty much at the bottom when nobody wants to buy real estate.

I suppose I’ll just have to sigh, and accept that media sources will always seek to find drama in the obvious.