By Mike Colpitts and Everett Jones
Credit crisis losses are nearing $8-trillion worldwide as a result of unscrupulous lending by mortgage companies, banks and newly developed instruments on Wall Street to resell the mortgages as securities to investors, a Housing Predictor investigation has revealed.
As President Bush signs the Housing Bill sent by Congress into law, the majority of homeowners facing the threat of foreclosure will fail to receive assistance from the package. Instead, the new series of solutions is more of an attempt by Congress and government leaders to re-stabilize the nation’s overall economy, severely damaged by the housing crisis.
As many as 400,000 homeowners may be assisted by the new programs, but even those will have to qualify under rigid guidelines and their lenders will have to agree to cut their mortgage balances in order to make the program work. The new law lacks the teeth requiring lenders to slash mortgage balances.
Chairman of the Committee on Banking Sen. Christopher Dodd, D-Conn., originally introduced the legislation in March and said the bill would help up to 1.5 million families facing foreclosure, but other congressional members say the bills restrictive nature and lack of enforcement powers of lenders make it impossible to help that many homeowners. Dodd has come under criticism and is reportedly under investigation by The Senate Ethics Committee for receiving mortgages under favorable conditions through Countrywide’s V.I.P. program as a “friend of Angelo.” Countrywide has also contributed funds to Dodd’s campaigns.
The number of homeowners at risk of foreclosure to gain assistance from the new program may be far less, as few as 300,000. Only owner occupants are eligible for the program, but two-thirds of all foreclosures hitting the courthouse steps these days are investor owned properties.
Even before the bill had been signed, real estate industry insiders are saying it is far too little too late to assist those caught in the chaos of the foreclosure epidemic. “In reality most mortgage lenders fail or refuse to help homeowners faced with foreclosure,” said Carey Sutton of Asante Real Estate Group in Los Gatos, California.
“Politicians poster with empty political promises and legislation that gives false hope to consumers and homeowners,” said Sutton. Asante has been trying to work out short sales with American Home Mortgage on two homes for months without success. One of the homes has an offer of $449,000 and the other is at $3.9-million.
Countrywide, once the nation’s largest mortgage lender, sold to Bank of America in a take-over as a result of failing in the crisis has also been criticized for failing to deal with the onslaught of foreclosures. More than a third of all the company’s subprime mortgages are in default.
The sale of properties below the mortgage owed, known as short sales, must be approved by lenders before closing, and as a result of new re-insurance purchased by many lenders on mortgages with less than 20% down, mortgage holders are rarely willing to negotiate realizing they won’t be paid the re-insurance money. It’s a new twist in what has developed into a new real estate economy nationwide. Studies indicate only 6 to 8% of all short sales by banks and mortgage lenders are being approved.
The nation’s real estate crisis first came to light on Wall Street when investors refused to buy securities to back the mortgages in mass nearly a year ago. Subprime mortgages are usually made in the form of adjustable rate mortgages to high-risk borrowers with low credit scores. But an onslaught of lawsuits have resulted in the maze of foreclosures taken out by subprime borrowers and by many others with more conventional mortgages, charging fraud and other improprieties.
The crisis has clearly grown from Wall Street to Main Street, sending neighborhoods throughout the nation into seas of foreclosures. As foreclosures rise, housing values in the majority of real estate markets throughout the country deflate.
In reality, the housing crisis started much earlier as mortgage companies developed aggressive new programs to make loans to just about everyone they could.
U.S. regulators took over two more banks on Friday and sold them to Mutual of Omaha Bank, the sixth and seventh bank failures this year following the seizure of IndyMac Bancorp Inc., two weeks ago. At least 150 other banks are on the Federal Deposit Insurance Corporation’s (FDIC) watch list of the more than 8,500 FDIC insured institutions.
As forecast by Housing Predictor close to two years ago, the foreclosure crisis is worsening and is still projected to result in at least an additional 3-million foreclosures through 2011. That number could rise.
Some lawmakers in Congress boast over their new efforts, likening it to Franklin Roosevelt’s New Deal enacted at the height of the Great Depression to save homes from foreclosure. However, the new series of laws has little resemblance to Roosevelt’s.
An over-whelming majority of the nation’s people are against a bail out of lenders and mortgage borrowers. Perhaps more would favor the bail-outs even though it may be against Americans inclination, if they realized the impact to the national economy. The government’s move to address the crisis lacks substance, developed to a large extent to only quell financial markets and produce only short term results, according to analysts who have studied the new proposals. Whether it is able to keep the nation from falling into a depression is another issue all together.
Initially, at least there’s not a lot of direct taxpayer money in the efforts approved by Congress. Low-cost government loans, increases in tax-exempt bonds by state housing authorities and the government’s guarantee of Fannie Mae and Freddie Mac are intended to act as healing mechanisms. Housing Predictor projects they will both eventually be funded by stock purchased at tax payers’ expense to supply future funding for mortgages. Nearly 80% of all mortgages are now supplied through both companies.
Some call the bail-out socialism. Some call it the New Era in America’s move to insure itself from financial ruin.
The total dollar loss in foreclosures alone will top $1-trillion, far greater than the U.S. Savings and Loan Fraud Crisis and far greater than the business models ever used by banks in their risk analysis.
Everett Jones contributed to this article from Washington, D.C.