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Lenders Try Workout, But Sweat The Rise In Foreclosures

Banking commissioners have observed that efforts to work with borrowers [1] going into default has been largely ineffective.

The study, compiled by the State Foreclosure Prevention Working Group, made up of banking regulators and attorneys general in 11 states, found that seven out of 10 borrowers who are seriously delinquent on their mortgages aren’t on track to receive any kind of help with their payment problems.

And that is not all.

Pew Charitable Trusts released a comprehensive report on the foreclosure problem called Defaulting on the Dream: States Respond to America’s Foreclosure Crisis [2] which is a good read (homework: try to figure out why large organizations select lame stock photography pictures of houses. PCT did it for this report, and Fannie and PMI do it too – oh, the lack of humanity.)

Foreclosures are rising rapidly [3] and that affects renters too. Housing is pushing the economy into a recession.

Almost every state in the country has seen a significant increase in mortgage foreclosures, largely triggered by defaults on subprime mortgages. Yet greater challenges lay ahead. Based on new foreclosure projections by the Center for Responsible Lending, Pew estimates that one in 33 current U.S. homeowners will be in foreclosure, primarily in the next two years—the direct result of subprime loans made in 2005 and 2006. Among the states hardest hit are Nevada, where one in 11 homeowners could soon be in foreclosure; California, with one in 20; Florida, with one in 26, and Georgia, with one in 27.

Of course there is a growing feeling of resentment by renters, which are one third of all US households [4], that a bailout of these borrowers is unacceptable.

“A third of the American public rents,” Brandon pointed out. “They’re saying ‘I’ve been saving for a mortgage for years. I could have jumped in on a subprime loan too. Now I’m going to have to pay for a government bailout.”

I don’t see how the Federal government can afford to bailout 1 out of every 33 homeowners. I don’t think it is going to correct the fundamental problem with the housing market. It’s about lack of liquidity in the credit markets. That has to be addressed in order for the free markets to work. Pumping money to borrowers won’t solve the problem.

The issue with the free markets as a solution is one of neutrality. If there is not a functioning structure in place that prevents the kind of collapse we are currently experiencing, it’s not a free market. It’s simply deja vu to the past problems. There was systemic collusion in the mortgage securitization industry – most parties to the ratings and collateral valuation process had their hand in the cookie jar. Until that is fixed, there isn’t much room for improvement and lenders will continue to sweat (and enjoy the large rate spreads).