Sunday, December 27, 2009

Foreclosures, Jobs, Bank Mergers, & What Retirement ?

As we approach the end of the year there are a number if issues we should keep in mind. All are important but at differing levels depending on our own circumstances

1. The Foreclosure Crisis is far from over. There are currently approximately 3.5 million homes in some stage of foreclosure. It is projected that 2010 will see another 3 million enter foreclosure (that's 6.5 million without any further economic deterioration). Keep in mind that this does not include mortgages in default, by even as much as 90 days, that have not been moved to the "F" status by the lender.

The Making Home Affordable Program ("MHA") is broken, probably beyond repair. Very few (less than 1% of the loans in the Trial Modification period) have made it to a permanent modification. Lenders are blaming borrowers for not sending in documents timely or for not making payments within the successive 30 day periods. True, the are a certain number of borrowers who will not be able to keep their homes because they could never have afforded it, or have had a life altering experience from which they cannot recover.

BUT, I have had to submit documents for 40% of my clients, for whom I am working the MHA program, 2, 3, and even 4 times; and sometimes Borrowers are promised coupons for payments, never get them, make a payment late and are disqualified from the program - this again from my personal experience as an attorney with knowledge of the MHA program, bankruptcy, mortgages, real estate conveyancing, finance and financial planning, money management, banking and economics.

2. Un-Employment and Under-Employment exceeds 14%. Add to that sobering figure the numbers of jobless who no longer have unemployment benefits and who have given up registering for jobs at the local State Agency, and we move to the 18%-20% range or 1 in 5 or 6 people in the eligible labor force. This does not help the foreclosure problem - it's hard to pay for your house with no job, or with receiving a cut in hours by 25%, or by getting a "new" job paying $11/hour instead of the $18/hr in the job just lost.

Un/under-employment doesn't help consumer spending either. People are spending less, especially for true discretionary items, like the new car, new television, new washing machine, extra pair of shoes, and eating out. That is bad for business profits which is bad for job creation or just job market stability. And it is not just the big stores that are suffering; in fact, they can weather the storm better than the mom and pop stores and small businesses nationwide. All of this leads to a further erosion in jobs and then another round of foreclosures, and then another bank failure and on and on.

3. In a mere 15 months there has been such a massive consolidation in the Banking and Finance sectors that 3 years ago the Justice Department would have been bringing anti-trust actions daily (yes, that is hyperbole but barely). How has this hurt? Try to get a loan from any non-local bank, especially if you have average credit individually or are a small business with no access to equity markets (selling stock for example) or public debt offerings (like corporate bonds).

So now we have businesses, under the gun because of a downturn in business which is caused by un/under-employment, which cannot get money to stay in business waiting for the economy to turn positive - thus another business failure. Or we have an individual who cannot convince his/her lender to modify a loan or refinance it (no cash out at closing, just a lower interest rate) because the bank finds the Borrower's credit does not meet the lender's NEW credit criteria.
Guess what? Another foreclosure! Oh, and by the way, each foreclosure tends to lower the values of homes around the foreclosed property, so equity evaporates making it impossible for the under-employed with an above-average but not stellar credit score to refinance because the loan-to-value ratio (amount of loan divided into the value of the house) is too high (greater then 70-80%).

4. The "golden years" of retirement? They may be gone for an entire generation who had investments in 401k plans, IRAs, and the stock market generally. Sure the markets are up in the sense that the Dow, NASDAQ, and S&P indices are up from their lows, but have average people recovered their losses. Basically NO! When we hear "The stock market is up 24% from a year ago" (still 30+% below where it was before the crash) that means that the securities traders are making money and some large corporations are as well. Sure, some individuals' portfolios have gained back part of the loss but recovered? NO! And we still do not know about Social Security, or health care, or ....

Further, as discussed on NPR's show "Marketplace Money" this morning by Knight Kiplinger, editor-in-chief of one of the most respected financial publications, there is a new reality: People cannot depend on the equity in their homes for part of their retirement funding. His comments went on to state that "... now housing has returned to its rightful place, as a place you live. It is shelter; it is not an investment".

This is a major change in approach from what had been a belief held for decades by homeowners, and was part of the advice given by investment counselors/financial planners to their customers/clients. It went something like this: "With the yearly appreciation on your house being 5%, in 14 1/2 years the value will have doubled and the mortgage will be paid down by one-half, so you'll have plenty of equity when you sell to buy that nice condo by the beach".

Now we cannot plan to use the house we live in for retirement money - after 25 years and 5 refinances, but never beyond 80% of the house's value, we will be lucky to have the funds to pay off the then existing mortgage and have a few dollars left for? Certainly not the condo on the beach. Is that what has happened in the housing market and if so, what is being done to stop the further erosion of value, goes down every time there is a foreclosure in the area of your home.

We go back to the Mortgage meltdown, the continuing high un/under- employment, the rampant crimes committed by Wall Street mortgage securitizers, and our own use of our homes as the means to get money for vacations, a new car, a new porch or pool etc. When you get a Home Equity Line Of Credit ("HELOC") and it comes with a debit card to make using the credit line easier, we should have known something was not right. Paying for a cup of coffee with your house's equity? Maybe not that bad but...

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More crucial is our attitude, the way we all believe this will turn out. There is growing despair among those hit hardest - those who have lost jobs and those who are losing homes. EMPLOYMENT is perhaps the biggest obstacle to overcome. If people are gainfully employed they can begin to recapture their lives. Then and only then there is the potential to save the home, or not worry about whether the heating bill should be paid or the electric bill; and the car payment?

After a sign that the job scene is getting better, people NEED to see and believe that the government is taking real steps to stop foreclosures. Earlier posts have discussed some of the ways the loans which have become securitized can be modified. That said, our current financial services (banking, brokerage, insurance) regulators like FDIC, Federal Reserve, Treasury Department must take action to force the lenders to modify those loans that already qualify for the MHA program. Lost documents, unreasonable deadlines given to borrowers, no clear instructions on where to send payments, an endless loop of telephone prompts without human intervention for 30-45 minutes, all have to stop.

Maybe the outcome of the foreclosures will be to create jobs with the companies that service the loans, inspect the properties, go to Court to evict you, and clean up the property to get the house ready for sale.

Prognosis? the patient, us, will live but what will be the quality of life?

Author's Copyright by Richard I. Isacoff, Esq, December 2009

1 comment:

morren said...

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