Bankrupting the Common People

Record 12 Percent Behind on Mortgage or in Foreclosure

May 28, 2009

AP - A stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and the rate for homeowners with all mortgage types hit a new record, new data Thursday showed. But that's not the worst of it.

The reckless lending practices in states like Florida, California and Nevada that were the epicenter of the housing crisis are no longer driving up the nation's delinquency rate. Instead, the foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs.

A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.

Prime and subprime fixed-rate loans saw sharp increases in the fourth quarter, a sign that the problem is now the economy.

"We're seeing increases in fixed-rate categories and that's where the problems are coming from," said Jay Brinkmann, the group's chief economist. "The foreclosure picture is more clearly driven by the jobs market."

That trend highlights one of the biggest challenges confronting the Obama administration's mortgage relief plan launched this week. While the $75 billion plan could help change the loan terms or refinance up to 9 million homeowners, unemployed borrowers will have a hard time qualifying.

On Thursday, the Labor Department said new unemployment claims last week totaled 639,000, lower than expected, but still at elevated levels. Factory orders also slipped for the sixth month in a row in January, the Commerce Department reported.

"There can be no doubt that employers continue to shed labor at a frightening pace, with no end in sight," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a client note Wednesday.

The key is what kind of workers are losing their jobs, Brinkmann said. Unemployment for people with college degrees, some college education or technical training—those most likely to own homes and have prime fixed-rate loans—has nearly doubled over the past six months. In New York, for example, where the financial industry is handing out pink slips like ticker tape, homeowners who once had good credit are defaulting at an increasing clip.

The only bright spot in the report is the devastation wrought by subprime ARMs appears to be waning. Their 30-day delinquency rate continues to fall and is at the lowest point since the first quarter of 2007. That offers little reassurance to Florida, where 60 percent of homeowners who have a subprime ARM are at least one payment behind and one in five of all mortgage holders aren't current.

The $4 Trillion Housing Headache

May 27, 2009

Fortune - Prices in big U.S. cities posted their biggest-ever decline in the first quarter, according to the most recent S&P/Case-Shiller National Home Price index. After nearly three years of declines, house prices nationwide are back at 2002 levels--and still falling.
Yet as bad as that is for overburdened homeowners and their bankers, the mighty mountain of mortgage debt Americans have taken on is an even bigger concern--especially for those who believe an economic recovery is in sight.

Even though the amount of home mortgage debt outstanding declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain distressingly high. Home mortgage debt outstanding was 73% of gross domestic product last year, according to government data. That's the third-highest reading on record, after the 75%-plus bubble years of 2006 and 2007.

Getting that ratio down to a more manageable number will mean more lean years ahead, as Americans further cut spending to rebuild their savings and banks struggle to boost their capital amid heavy loan losses. How long this process might take is a key question for those trying to gauge the prospects for an economic recovery.

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy--a course of action that will do little to solve the problem of too much debt. Of course, these figures reflect only back-of-the-envelope estimates. Depending on the level of interest rates and how successful officials are in restoring the vigor of the lending markets, mortgage debt may or may not need to drop that far to relieve some of the stress on consumers.

Still, there is little doubt that above-average debt levels will impede the sort of consumer-driven economic rebound that has taken place after the last few recessions.

"I don't think that there is any magic to the '90s debt levels," said Dean Baker, an economist at the Center for Economic and Policy Research in Washington. "The point is that with higher debt levels, people will be consuming less."

Senate OKs Bill to Rein in Credit Card Practices

May 19, 2009

AP - The Senate voted overwhelmingly on Tuesday to rein in credit card rate increases and excessive fees, hoping to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure...

If enacted into law as expected, the credit card industry would have nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee. They'd also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.

Some of these changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put these changes into law and go further in restricting the types of bank fees and who can get a card.

For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.

Bankers warned the measure would restrict credit at a time when Americans need it most. They defended their existing interest rates and fees on grounds that their business — lending money to consumers with no collateral and little more than a promise to pay it back — is very risky.

"What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said Edward Yingling, president and CEO of the American Bankers Association.

"It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate," Yingling added.

Voting against the Senate measure were GOP Sens. Lamar Alexander of Tennessee, Robert Bennett of Utah, Jon Kyl of Arizona and John Thune of South Dakota, as well as Democratic Sen. Tim Johnson of South Dakota.

But other senators didn't want to face voters in the 2010 election without proof that they are listening to constituents crushed by foreclosure rates and joblessness. Recent reports show that the number of foreclosures jumped 32 percent in April compared with the same month last year, while the jobless rate that month rose to 8.9 percent.

The legislation would not cap interest rates as some lawmakers had hoped. It also wouldn't prevent lenders from finding new ways to drain customers' bank accounts or keep consumers from spending money they don't have.

But it would give spenders more flexibility and outlaw many of the surprise costs associated with credit cards at a time when money is tight in most households. For example, under the bill, a cardholder would have to opt to be allowed to go over a credit limit. If customers don't agree and the bank authorizes a charge that would push them over their limit, the lender couldn't levy an over-limit fee.

Another boon for consumers is limiting a practice known as "universal default," when a lender sharply increases a cardholder's interest rate on an existing balance because the customer is late paying that bill or other, unrelated bills. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance.

Even then, the credit card company would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time...

If the two bills are passed separately as expected, they would be rejoined before being sent to the president as a single bill, said Hoyer, D-Md.

U.S. Foreclosure Filings Hit Record for Second Straight Month

May 13, 2009

Bloomberg - A total of 342,038 properties received a default or auction notice or were seized last month...

“What you’re seeing is the inevitable result of severe job losses,” Nicolas Retsinas, director of housing studies at Harvard University in Cambridge, Massachusetts, said in an interview. “Until we stem the job losses, we can expect to see continuing foreclosures.”

Unemployment is hampering the housing market as property prices fall. The U.S. jobless rate rose to 8.9 percent, the highest in more than a quarter century, the Labor Department said May 9. Home prices fell the most on record in the first quarter to a median $169,000 amid sales of foreclosure properties, the National Association of Realtors said yesterday...

Senate Moves Toward Easing Mortgage Terms

May 7, 2009

AP – Trying to curb home foreclosures, the Senate voted on Wednesday to make it easier for homeowners with risky credit to switch to a lower-cost mortgage backed by the government. The bill, passed 91-5, also would give banks a break by encouraging reduced fees they must pay for the government to insure deposits.

While both steps put taxpayer money on the line, lawmakers say the legislation is needed to prevent the economy from getting worse.

"Given the size and scope of the struggles too many Nevadans and Americans endure, it will take more time before housing normalizes again," said Senate Majority Leader Harry Reid, D-Nev. "But with this bill, we are working to hasten that day so that no family will ever accept losing its home as the way it is."

Absent from the measure was a bankruptcy provision that President Barack Obama had promised to push through Congress, but backed down amid stiff opposition from banks. The provision, rejected by the Senate last week in a 45-51 vote, would have allowed bankruptcy judges to lower a person's mortgage payment.

While the House included the provision when it passed its version of the bill in March, lawmakers said it didn't have enough support to insist it be included in the final compromise bill. The two chambers have to iron out their differences in the legislation before it can be sent to Obama to sign.

"That issue is a dead letter," said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee.

Also on Wednesday, the House agreed to a Senate-passed bill that would hire hundreds more FBI agents and prosecutors to investigate mortgage fraud. The legislation, expected to reach the president's desk soon, also would establish a $5 million, independent commission to investigate the cause of the financial crisis and chart a path forward.

The Senate housing bill would expand an existing $300 billion program called "Hope for Homeowners," which encourages lenders to write down an individual's mortgage if the homeowner agrees to pay an insurance premium. The program, which is set to expire in 2011, is intended to swap out a homeowner's high-interest rate for a 30-year fixed loan backed by the Federal Housing Administration.

So far, the program has been a dud.

When it was established last year, Congress envisioned helping some 400,000 troubled homeowners. But because eligibility requirements were so strict, one borrower has completed the refinancing process and only 51 more are in the works, according to statistics released last week.

The Senate bill would expand eligibility. For example, the program currently bans participants who intentionally defaulted on the mortgage or other substantial debt. The Senate bill would narrow that prohibition to defaults within the last five years.

Republicans swung behind the proposal to expand the program using $2 billion from the $700 billion Wall Street bailout fund. Sen. Richard Shelby of Alabama, the top Republican on the Banking Committee, co-sponsored the bill with Dodd.

Still, some Republicans warned that increasing the burden of the government to insure risky mortgages — even if it saves people from foreclosure — could backfire. Sen. David Vitter, R-La., who called the Federal Housing Administration a potential "ticking time bomb," proposed letting the administration suspend any programs that threaten its solvency.

His effort was defeated 36-56.

Another issue is whether Hope for Homeowners will be enough to keep people in their homes, considering other voluntary efforts haven't provided homeowners steep discounts. According to a report released last month by federal regulators, fewer than half of the loan modifications made by lenders at the end of last year reduced payments by more than 10 percent.

The Senate housing bill also would permanently increase the borrowing authority for the Federal Deposit Insurance Corporation from $30 billion to $100 billion. Increasing the FDIC's credit would allow the agency to reduce large new premiums it has begun charging banks to insure deposits.

In addition, the bill extends through 2013 an increase in deposit insurance by the FDIC from $100,000 to $250,000.

More Than One in Five Homeowners Underwater: Zillow

May 6, 2009

Reuters - Home values in the United States extended their fall in the first quarter, with more than one in five homeowners now owing more on their mortgages than their homes are worth, real estate website Zillow.com said on Wednesday.

U.S. home values posted a year-over-year decline of 14.2 percent to a Zillow Home Value Index of $182,378, resulting in a total 21.8 percent drop since the market peaked in 2006, according to Zillow's first-quarter Real Estate Market Reports, which encompass 161 metropolitan areas and cover the value changes in all homes, not just homes that have recently sold.

U.S. homes lost $704 billion in value during the first quarter and have depreciated $3.8 trillion in the past 12 months, according to analysis of the reports.

Declining home values left 21.9 percent of all American homeowners with negative equity by the end of the first quarter, Zillow said.

By comparison, 17.6 percent of all homeowners owed more on their mortgage than their property was worth in the fourth quarter of 2008, and 14.3 percent were underwater in the third quarter of last year, the reports showed.

Nine consecutive quarters of declines have left eight regions--including the Modesto, California, Stockton, California, and Fort Myers, Florida regions--with median value declines of more than 50 percent since those markets peaked.

In 85 of the 161 markets covered in the report, the annualized change over the past five years is negative or flat, the reports showed...

Almost a Quarter of U.S. Homeowners Are Underwater

U.S. Families Rely on Handouts in World’s Richest Country

May 2, 2009

Guardian - One in six of West Virginia’s 1.8 million people receive government food stamps — one of the highest rates in the country — and the total is rising by the week...

Senate Defeats Bid to Let Homeowners Seek Foreclosure Relief in Bankruptcy Court

April 30, 2009

Associated Press - The Democratic-controlled Senate on Thursday defeated a plan to spare hundreds of thousands of homeowners from foreclosure through bankruptcy, a proposal that President Barack Obama embraced but did little to see through.

A dozen Democrats joined Republicans in the 45-51 vote to scuttle the measure, which Obama had said was important to saving the economy and promised to push through Congress. But facing stiff opposition from banks, Obama did little to pressure lawmakers who worried it would encourage bankruptcy filings and spike interest rates.

"The vote today was a bipartisan rejection of an interest-rate hike, which is exactly the wrong solution for jobs, homeowners and the economy," said Senate Republican leader Mitch McConnell of Kentucky.

Democratic leaders lamented that they were powerless, with the 45 votes falling far short of the 60 to overcome procedural hurdles. The newest Democrat, Sen. Arlen Specter of Pennsylvania, voted against it.

"The banks that are too big to fail are saying that 8 million Americans facing foreclosure are too little to count in this economy," said Senate Majority Whip Dick Durbin of Illinois, who championed the measure and had spent weeks negotiating with financial lobbyists in a bid to strike a deal.

Obama long has backed the proposal to give debt-ridden individuals the option of asking a bankruptcy judge to reduce their mortgage payment. He cited that support last fall as he privately lobbied skeptical Democrats to back the $700 billion Wall Street bailout. And once he was president, he had promised, he would push for its passage.

In February, the newly inaugurated president included the proposal as the stick in a housing plan full of carrots for the banking industry. The broader rescue plan encouraged, but did not require, lenders to cut homeowners' monthly payments and refinance loans for individuals whose home's market value has sunk below what they owe.

The following month, the House passed the bankruptcy legislation along party lines in a 234-191 vote.

But the bankruptcy option got only a tepid endorsement from Treasury Secretary Timothy Geithner. As debate on the measure brewed, Geithner was pushing for the creation of a government-sponsored program that would rely on private investors to buy the risky mortgage-backed securities weighing down the market.

The forced easing, or "cram-down," of a mortgage by a bankruptcy judge would have likely introduced additional uncertainty for investors.

Congressional Democrats also questioned the merits.

"Do I want to have my rate go up so that somebody else might be able to cram down" their mortgage payment? asked Sen. Ben Nelson, D-Neb., who voted against the measure.

In recent days, as it became clear the measure would fail, the administration did little to counter the aggressive lobbying by banks fighting the proposal and focused its efforts instead on a more popular bill targeting credit card companies.

Spokeswomen at the Treasury Department and White House did not respond to requests for comment, and absent from the debate was any statement of administration policy.

Obama supporters blamed the banks.

"There was a lot of fear-mongering," said Andrew Jakabovics, associate director for housing and economics at the Center for American Progress in Washington. "The banks put on a good show, saying, 'Hey, if you force us to take more losses, we're going to go out of business.'"

Indeed, the banking industry had a direct line to Capitol Hill. Officials from some of the biggest banks, including JP Morgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., as well as groups representing credit unions and community banks, negotiated for weeks with Durbin and other leading Senate Democrats.

Trying to win support, Durbin narrowed the provision substantially. The latest proposal would have restricted eligibility to homeowners already in foreclosure whose lender had not offered them better terms. Homes would also have to be worth less than $729,000 and apply to mortgage loans originated before 2009.

Durbin had offered the measure as an amendment to a housing bill aimed at easing the nation's credit crunch. That bill would guarantee bank deposits up to $250,000 through 2013.

The bill also would permanently increase the borrowing authority for the Federal Deposit Insurance Corp. from $30 billion to $100 billion. Increasing the FDIC's credit would allow the agency to reduce large new premiums it has begun charging banks to insure deposits.

The Senate is expected to vote on that measure next week. Durbin said he would try to restore the bankruptcy provision in conference with the House, although it was considered unlikely he would succeed.

"I'll be back," he said. "I'm not going to give up."