BLOG VIEW: No Surprises Here, But A Possible New Strategy


The cover of the March 10th issue of U.S. News & World Report displays a picture of a presumably foreclosure-affected house dropping from the sky and sinking into a U.S. map, crushing several states in its path. The accompanying (glowing green) headline reads ‘Why the Housing Crisis Is Bigger Than You Think,’ while the table of contents reminds readers ‘It's Not Just Home Prices Anymore,’ and, finally, the article itself is dubbed ‘Nightmare On Main Street.’

But for all the sinister mystery implied, the article highlights only very familiar – albeit extremely painful – themes in the mortgage industry and U.S. economy these days: tightening credit, fearful investors, homes with values below their mortgages' values, neighborhoods in decline and, of course, that potential-to-impending recession. Have you heard?

So fortunately for MortgageOrb readers, at least, contrary to the cover headline, the housing crisis is most likely not bigger than you think.

That is not to say that crucial indicators are not continuing to worsen – just as we thought. According to the Mortgage Bankers Association's (MBA) latest delinquency and foreclosure survey, the delinquency rate for loans on one-to-four-unit residential properties reached 5.82% of all loans outstanding in the fourth quarter of 2007. This figure does include loans in the process of foreclosure, the MBA notes.

Moreover, the total delinquency rate is the highest the MBA has seen since 1985, and both the rate of foreclosure starts and the percent of loans in the process of foreclosure are at their highest levels ever.

Although U.S. News & World Report reminded us that ‘It's Not Just Home Prices Anymore,’ according to Doug Duncan, the MBA's chief economist, in many locales, ‘it’ (the housing crisis and subsequent economic fallout) may not have been primarily about home prices in the first place.

‘In states like Ohio and Michigan, declines in the demand for homes due to job losses and out-migration have left those looking to sell the homes with fewer potential buyers, particularly with the much tighter credit restrictions borrowers now face,’ he explained in the MBA's report. ‘In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through.’

In the meantime, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve, told the Independent Community Bankers of America (ICBA) earlier this week that in addition to existing efforts to prevent foreclosure, what he terms a ‘vigorous response’ is required.

At the ICBA annual convention, Bernanke acknowledged that interest-rate reductions may be an appropriate approach to loan workouts and loss mitigation in certain situations. However, he added, ‘In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.’

‘In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances,’ he continued. ‘â�¦Servicers couldâ�¦benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool.’

Like other foreclosure-prevention methods recently proposed by various elected officials, Bernanke's controversial suggestion will likely be fiercely debated – and has already begun to generate questions.

In one immediate and high-profile response, Treasury Secretary Henry Paulson stated that although the principal-reduction strategy might be useful as an available tool, the process, like other modifications, should not be mandated by courts or use taxpayers' money, according to a Reuters report.

Jessica Lillian, Commercial Mortgage Insight

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