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| Financial Markets and Economy Cannot Wait Until 2009 for a Real Foreclosure Fix |
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“The impact of further home price declines, deteriorating bank assets (in the form of foreclosed properties), and real estate-induced job losses is a toxic mix. Those forces together likely will further undermine the economy, destabilize the financial markets, and spur more foreclosures,” said James H. Carr, Chief Operating Officer for the National Community Reinvestment Coalition.
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Financial Markets and Economy Cannot Wait Until 2009 for a Real Foreclosure Fix
NCRC says housing legislation will have “little effect.” Washington, DC, July 25 – The National Community Reinvestment Coalition (NCRC) today said that HR 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008, set to become law, will likely have little effect on the foreclosure crisis gripping the financial markets and economy. The program does not take effect until October 1. Assuming two months for FHA to ramp up for the new program, it is unlikely to be operating at full capacity until next year. Yet even then, the impact is likely to be modest due to the relatively few borrowers to be aided by the package. At best, 400,000 families will be assisted with the new legislation. While that is a welcome measure it will not have a pervasive impact on the economy or on lenders portfolios, considering that as many as 2.5 million households will experience foreclosure this year alone. “The impact of further home price declines, deteriorating bank assets (in the form of foreclosed properties), and real estate-induced job losses is a toxic mix. Those forces together likely will further undermine the economy, destabilize the financial markets, and spur more foreclosures,” said James H. Carr, Chief Operating Officer for the National Community Reinvestment Coalition. Realty Trac data released today paints a continuing bleak picture for the housing market. They estimate foreclosures are up more than 120 percent for the second quarter of 2008 relative to the same period last year. That represents nearly 740,000 homes experiencing foreclosure over the past three months. If this mortgage failure rate were to continue through the end of the year, with no further increases, roughly 1.5 million additional homes will be lost to foreclosure between now and the time the new legislation will likely have an impact. To date, the most substantial federal support to address the foreclosure crisis has been channeled to financial institutions to improve market liquidity. “The underlying problem crippling the financial markets is failing assets in the form of foreclosures. As a result, assisting families to maintain their homes is an essential ingredient to improve bank capital and liquidity, said Carr. He further noted that “while it’s true, for example, that a federal backstop for the Fannie Mae and Freddie Mac was important to calm anxieties in the financial markets, panic will likely ensue if either of those institutions draw down on that new authority. As a result, more substantially aiding borrowers heading to foreclosure must be part of the financial system stability equation.” For at least five reasons, substantially more foreclosure pain remains in the system. First, subprime adjustable rate loans have not yet reached their peak reset rates. The negative impact on house prices is already having a contagion influence throughout the economy. Second, hundreds of thousands of adjustable rate subprime mortgages that were scheduled for their first reset this year, have avoided payment shock because of the low-interest rate environment created by the Federal Reserve. With rising inflation concerns, that monetary position by the Federal Reserve is already being debated. When the Federal Reserve reverses its current policy direction and increases rates, interest payments on millions of subprime adjustable loans will begin to climb, creating affordability challenges for their borrowers. Third, temporary modifications offered by lending institutions are resulting in the delay or avoidance of some foreclosures; but the economic relief created by these modifications is not permanent. Fourth, the peak reset rates on pay-option ARMs begin in 2009 and continue through 2011. Those loans are expected to experience high default rates, given the fact that they are disproportionately investor loans, many are already under water, few had any initial equity and most are being financed using minimum payments. Fifth, defaults on Home Equity Lines of Credit (HELOCs) may also result in growing foreclosures should home prices continue to fall. The National Community Reinvestment Coalition is an association of more than 600 community-based organizations that promote access to basic banking services, including credit and savings, to create and sustain affordable housing, job development and vibrant communities for America's working families.
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