RebelCapitalist: Financial Information for the Rest of Us

Just Blow it Up!

May 19, 2010 | By: Mr_Blue | Tags: mortgage crisis, foreclosure, mortgages, obama

The residential mortgage market is completely broken. Yesterday, Mortgage Bankers Association announced that a record 14.69% mortgage loans were either one payment delinquent or in the foreclosure process in Q1 2010 (seasonally adjusted). A record and the problem is widespread - 34 states and DC have total delinquency rates over 10%. This problem isn’t going away like the Obama Administration would like and could get much worse.

In fact if the jobs situation doesn’t improve soon the mortgage crisis will continue to worsen. Early on in this crisis negative equity (when home value is less than what is owed on it) was a huge problem - it still is. Now, persistently high unemployment is compounding the problem. This from Calculated Risk:

FHA foreclosure starts up sharply.

“Shadow inventory” of 4.3 million loans that need to worked through (90 day delinquent or in foreclosure) - or they will become REOs or distressed sales.

Prime fixed rate is now the key problem!

“Sand states” will not be as dominant as the problem moves to prime fixed rate.

Still expect some improvement this year for delinquencies, although a little less optimistic than last quarter.

Prime mortgages are a problem because of negative equity and unemployment. Now, this mortgage crisis is starting to effect more than just the borrower and lender. It’s stopping people who want or need to sell their home for other reasons such as job relocation. It’s hurting home values which for many middle class families is the most valuable asset.

The mortgage crisis is deep but the Obama Administration used a carrot when it needed a stick. It first used a carrot to entice lenders to agree to modifications. Now, the Administration keeps tweaking the failed program but the results are the same - foreclosures and delinquencies are not decreasing.

The Obama Administration needed the big stick. It needed to really help homeowners instead of helping the financial conglomerates. We needed system wide principal reductions to start and some other things such as an own to rent program.

We have reached a point where the Obama Administration needs to recognize that its attempts to address the mortgage crisis have failed to help homeowners. It should stop giving financial conglomerates another bailout. The only alternative is to blow it up - the residential mortgage market and start with something new:

1) We need a less complex and more transparent mortgage market.

2) Fannie Mae and Freddie Mac should be merged and truly nationalized (both stocks are still being traded on stock exchanges). The merged entity can serve as the first Mortgage Credit Institutions under proposal #1.

3) Offer option to all borrowers with a non-traditional or exotic mortgage such as Option ARM to either 1) refinance to a fixed rate mortgage or 2) Own to Rent.

Who said the following:

I say this not to sow fear, but to state a fact: the magnitude of our challenges has yet to be met by the measure of our action.

Answer: President Barack Obama in a speech to U.N. General Assembly. I would ask the President to listen to his own words and act accordingly when it comes to the mortgage crisis (and economic crisis in general). We need programs that meet the magnitude of the challenges.

Good luck.