bank run blog

A recent study by economists from the Federal Reserve predicts that increasing unemployment, now reaching the mid-teens in many regions, will spark another wave of home foreclosures in the US. Two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher write;

“Job losses and falling home prices have a bigger effect on delinquencies than mortgage terms, and modifications aren’t necessarily a better deal for investors than foreclosures.”

The notion calls into question the cooperative federal program whereby banks have been entreated by politicians to help struggling homeowners by “re-working” mortgages (eliminating fees, extending the length of loans, granting temporary forbearance and in some cases even reducing usurious interest rates- but never agreeing that the value of the mortgaged properties were wildly inflated) cannot stanch the coming deluge of foreclosed families.

The then-Bush-now-Obama plan of politely asking for the assistance of banks (that are, in many cases, receiving government dollars as they claim solvency) says the Fed researchers, “contends that the crisis can be attenuated by changing the terms of ‘unaffordable’ mortgages.” With an army of jobless unable to pay for groceries, much less a home loan, policies aimed at reducing a borrower’s debt-to-income ratio “face important hurdles in addressing the housing crisis.” Obama has pledged $75 million dollars to banks and homeowners so they can try to ‘work it out’.

The federal bankers say that it may be better to provide government bridge loans to unemployed workers as they ride out the next phase of the New Depression, hunkering down in a desolate foreclosureland seeking part-time employment in the food courts of shuttered big-box plazas.

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Los Angeles Times : Mortgage modifications may not stem foreclosures, Fed economists say

The other shoe has dropped.

Bloomberg reports that mortgage delinquincies of commercial properties are beginning to been seen across the US. Bloomberg writes;

“Loans secured by properties that were writtenassuming rental growth have been unable to meet targets, leading to increased defaults. The delinquency rate for North American commercial real estate loans in mortgage backed securities may triple in 2009 as loans default.”

Some regions have been hit hard and hit early, Bloomberg reports;

“Office, retail, apartment and industrial properties with mortgage payments 60 days late or more rose to 3.93 percent as of March in Cleveland area and 3.75 percent in the Detroit area…The North American commercial property delinquency rate is 1.1 percent according to Standard and Poor’s.”

Cleveland had a commercial real estate vacancy rate of 14.8 in 2008 which is forcast to rise to more than 20 percent by 2010. Ohio has unemployment levels that outpace the national average. In December, the unemployment rate in Ohio was 8.8 percent and the state lost a further 214,000 jobs in January. Detroit’s unemployment rate is even greater, with 10.6 percent of its workers receiving unemployment insurance.

The service also said that that Phoenix area had the “second highest percentage of 30-day late commercial real estate loan payments” and that other regions, such as the Las Vegas area, could see commercial defaults increasing over the course of 2009.

“Cleveland and Detroit are just the first to see the stress. They’re the canaries in the coal mine”, Bloomberg qoutes chief economist for Grubb Ellis, “There is really no part of the country being spared.”

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Bloomberg : Cleveland Commercial Loan Delinquencies Signal More Declines

The bedrock asset of most Americans, their home, is declining in value at a record rate. CNN reports;

“The Federal Housing Finance Agency (FHFA) reported that home prices fell a record 1.8% for the month, compared with October, declining at an annualized rate of nearly 20%. That follows losses of 1.2% and 1.1% in the two previous months. For the 12 months ended November 30, prices fell 8.7%, which was the largest 12-month price drop ever for the 17-year-old index.”

Reductions in home value were even greater in certain regions, CNN wrtes;

“According to FHFA, the Great Plains and prairie states of North and South Dakota, Nebraska, Kansas, Iowa, Missouri and Minnesota were the worst-hit U.S. regions in November. Prices there dropped a whopping 2.7%.”

The FHFA index tracks the purchase price of homes bought with loans of $417,000 or less that are sold to or guaranteed by the federally controlled mortgage firms Fannie Mae and Freddie Mac.

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CNN Money : Home prices see sharp dip

Bloomberg reports that the government controlled mortgage giant Freddie Mac is poised to request additional billions of dollars in federal monies as “fourth quarter operating losses will again drive its net worth to below zero.” Bloomberg predicts that Freddie Mac will seek $35 billion more in government aid, and that government supported Fannie Mae will also soon require an additional infusion of taxpayer cash. Freddie Mac received $13.5 billion from the US Treasury Department in November.

Bloomberg quotes an analyst with FBR Capital Markets, Pete Millier, who said;

“Their losses are going to be much higher than anyone anticipated. The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime.” Alt-A loans were made to borrowers with little or no income verification or to those with credit scores slightly above subprime.”

Freddie Mac and Fannie are the largest mortgage companies in the US, owning or guaranteeing a nearly half of the $12 trillion home mortgage market. The two companies have posted five consecutive quarters of losses totaling $68.4 billion.

When the companies were taken into receivership by the Treasury Department last fall, they were guaranteed up to $300 million in emergency funds, but even that amount may not be sufficient. Fannie Mae is expected to seek $100 billion of the promised monies. Miller said;

“Given that they have $4.5 trillion of risk out there, $100 billion is a drop in the bucket. Given the fact that their risk profile on these loans is greater than they led everyone to believe, greater than $100 billion in losses on each institution would not surprise me.”

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Bloomberg : Freddie Seeks Up to $35 Billion From U.S.; Fannie May Follow

This segment from the Associated Press focuses on the town of Mountain House California, where nearly 90-percent of homeowners owe more on their mortgages than their houses are worth. Hundreds of residents have been forced to walk away – and hand their homes back over to the banks.