Mortgage foreclosures swamp banks, homeowners allowed to stay despite defaults

There are so many mortgage defaults on top of foreclosures that banks are being overwhelmed. Two per cent of mortgages have been foreclosed, and 3.6 per cent are in arrears of more than 90 days. Banks are now “starting to look the other way."

There are theories about why the banks are being so uncharacteristically generous. Bloomberg reports: “Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.

``We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview. ``Looking at the data, we see the problems, but they are probably measurably greater than we think.''” Translation: the real foreclosure rate should include the number of defaults, but because they haven’t been foreclosed, the actual situation is ambiguous. Added to which nobody’s entirely sure of the real rate of defaults. There’s a further situation. Banks aren’t actually all that keen to have their asset portfolios decimated by defaults. It greatly reduces the value of their loans, and in return gives them possession of properties which are worth a lot less on the market than the value of the mortgages. On top of which, the banks have to deal with costs of maintaining the houses, including replacing losses from theft and vandalism, legal fees, and the time factor. That can add up to 15% of the value of the house, which then has to be turned into a commercial proposition by renting it out, or sale. Either way, foreclose or not, the banks lose. House values have dropped drastically, and the glut of properties on the market is making it worse, driving down house prices further. Simultaneously, the credit crunch is putting the brakes on borrowing, as well as sending up rates and making it harder for mortgagees to maintain their payments. Mortgagees, meanwhile, are paying for the house prices at which they bought, prior to the housing crash, well above their current market value. Court proceedings, collecting payments and foreclosure are starting a minor boom in employment in mortgage servicing as the housing situation becomes a cycle of legal and financial procedures across the country. Meanwhile, the idea of affordable payments is adding an element of farce, to an already rather idiotic situation. In an unexpected bit of rational thinking, some lenders are sticking to the idea of foreclosure as a matter of last resort, and attempting to rework loans into viable propositions. That idea was first proposed at the start of the default situation, when it was innocently thought that mortgages which were at least paying were better than those that weren't. Another naive concept was that the subprimes, if turned into workable mortgages, might be less worthless than they became after the meltdown, and the retail mortgage rates went up, preventing any possibility of their ever being viable. In practice, kicking out mortgagees doesn’t make much sense, particularly if they were able to pay on previous agreed rates, and only defaulted on higher rates. Affordable rates are obviously not getting much traction in the mortgage industry, from the steady increase in defaults. So the score is: Banks lose money Financial institutions and investors lose money Anyone connected with subprimes loses money Borrowers lose money and/or houses Homeowners lose money Revenue at all levels loses money Local businesses loses money The construction industry loses money Ancillary industries like plumbing and home renovations, furnishings and fittings lose money. Pretty thorough, isn’t it? Real estate speculators, anyone with cash, are making money, snapping up bargains at charity rates. People are parked outside courts with cell phones, keeping up to date with the next Christmas present. Resale value will be lower than the original prices, but there’s a built in profit down the track as the market picks up again over time. Even the land, in some cases, will be worth more than what’s on it. The banks and lenders have dealt themselves out of the market, by their own methods. Some years from now, this will be taught in economics classes as how not to operate a mortgage industry. And a museum dedicated to absurd commercial practices will open, a sort of Ripley’s Believe It Or Not Of Banking, which will be founded to fund research to find ways of preventing banks becoming extinct. The building will be the size of a sports stadium, made of foreclosure documents, political housing policy statements, and credit rating reports. Visitors will be able to view old bank statements showing how their ancestors and their descendants went broke. At the front of this museum will be a spruiker, dressed in traditional 21st century banker’s clothing with gold lame diaper, and a ceremonial bucket and spade, trying to sell graves as cheap residential property at a million dollars or so per plot, and still losing money on every single deal.