INSIGHT: Foreclosure crisis a new threat to housing, US economy

14 October 2010 15:50  [Source: ICIS news]

By Joe Kamalick

Foreclosure crisis puts huge boulder on road to recoveryWASHINGTON (ICIS)--A major crisis in US home loan foreclosure processes throws a new threat at hopes for a housing sector recovery and could impede growth for chemicals and a broad range of other manufacturing industries.

Bank of America, GMAC Mortgage, J P Morgan Chase and other major lenders announced this week that they have put foreclosures on hold while they investigate whether proper administrative reviews were followed in repossessing properties of homeowners in default.

The banks acted after disclosures that some foreclosure orders lacked proper documentation, may have been signed by unauthorised bank officials or may have been executed without the supervision of a notary public, a legal requirement in many states.

According to accusations levelled by several state governments, foreclosure documents and execution orders may have been hurriedly signed by unauthorised bank staff in a production-line process with little or no attention paid to documentation, homeowner communications or legalities.

One state attorney general who is leading a 50-state investigation into the mess called it “robo-signing” of foreclosure orders.

Referring to robo-signing and other slipshod foreclosure procedures, Iowa Attorney General Tom Miller said: “We believe such a process may constitute a deceptive act and/or an unfair practice or otherwise violate state laws”.

Miller is leading a group of all 50 state attorneys-general along with various state banking and mortgage regulators across the country in a nationwide investigation of major lenders.

He said the 50-state investigative body - titled the Mortgage Foreclosure Multistate Group - wants an immediate end to improper foreclosures and a review of past and present practices by loan service firms.

Miller said the group also wants an evaluation of potential remedies for improperly processed foreclosures and rules to deter such actions in future and, finally, creation of a mechanism for more effective independent monitoring of mortgage foreclosure procedures.

State legislators and several members of the US Congress - many of whom are in the midst of fighting for their jobs in the looming 2 November national elections - have called for a moratorium on further foreclosures until the various state-regulated procedures can be sorted out and remedied.

All well and good, but the multiple legislative, regulatory and banking industry inquiries could take months to complete.

In the meantime, the already moribund US housing and real estate markets will be stuck in depression limbo, according to economists across the housing and manufacturing sectors.

The National Association of Realtors (NAR) warned that “a prolonged review process would have a damaging impact on many communities and hinder the nation’s economic recovery”.

NAR President Vicki Golder said that she was getting reports from member real estate agents that the foreclosure moratorium “is already creating some anxiety among purchasers as transactions are being delayed and that some foreclosure listings are being removed from the market”.

Some real estate analysts worry that the multiple state, federal and banking industry inquiries could end in legal nightmares, perhaps with some foreclosed and re-sold homes being returned to their original owners.

The foreclosure crisis and the uncertain results of all the various multi-agency investigations also may chill even further home loan activity because mortgage lenders cannot know whether and under what circumstances they will be able to take foreclosure action against future loan defaulters.

“This is messing everything up,” said Bernard Markstein, senior economist at the National Association of Home Builders (NAHB). “This is creating more uncertainty and more problems in general, and the housing industry doesn’t need more confusion.”

“This is already a very fragile market,” Markstein said of the housing sector, “and anything that hinders sales further comes when we already have so many impediments”.

He noted that banks were already very tight with mortgage loan terms, requiring near-perfect credit ratings of borrowers and large down-payments, and that property values and assessments often are unfairly judged by appraisers.

“The overall economy is still weak, the labour situation is still bad, and the economy is only slowly adding jobs,” he added.  “This is not an atmosphere where people want to buy homes.”

“We’ve been saying for two years now that ‘This must be the bottom’, that the free-fall in sales and home prices has finally bottomed out - and that there can’t be another shoe to drop,” he said.

“But now, with this foreclosure mess, it’s as if we’ve opened Imelda Marcos’s closet and there are a whole lot more shoes to drop!”

Cliff Waldman, global economist for the Manufacturers Alliance, warned that the foreclosure crisis could delay a housing sector recovery for months, and consequently could put back indefinitely a hoped-for upturn in demand for a broad range of manufactured goods and materials.

“This foreclosure moratorium is exactly like shutting down the stock market in the middle of the day when the market is plummeting,” Waldman said.

“It sounds like a nice idea, but it just puts everything on hold and delays the bottom and delays recovery,” he said.

“This is a hard thing,” he added, "families are losing their homes, investors are losing their money - but for a better day to come, we have to let the market hit bottom.”

“As long as this foreclosure crisis persists, the housing market will stay where it is - which is nowhere,” Waldman said.

“For manufacturers, this will just help keep the economy weak,” he added.

“We need the housing sector to come back if we’re going to see a real recovery in the economy, and this crisis will keep all sorts of demand weaker than it otherwise might have been,” he said. He noted that consumer spending remains modest at best, and while capital spending by business has improved, it too has been only moderate.

“So this is hurting manufacturing by hurting demand,” he said. “Walk into a home and touch anything, and you’re touching some product of manufacturing - appliances, furniture, carpeting, lumber, roofing, bathroom sinks and faucets - the output of a hundred different manufacturing sectors.”

That is especially true of the US chemicals and plastics industries for which housing construction, repair and renovation represent a major downstream consuming sector for a wide variety of their products.

The American Chemistry Council (ACC) estimates that each new home built represents some $16,000 (€11,520) worth of chemicals and derivatives used in the structure or in production of component materials.

Sales of existing homes do not generate as much chemicals consumption as new homes, but if existing homes aren’t selling, new homes won’t be built.

“What this is doing is preventing the housing market from clearing, keeping it from self-correcting,” said ACC chief economist Kevin Swift, referring to the foreclosure problem.

“This will delay an eventual recovery of the housing market,” he added. “The market needs to clear those houses whose owners are under water on the mortgage, houses that ordinarily would be going through the foreclosure process.”

But not now, and perhaps not for some time to come.

Swift said the foreclosure mess will add still more homes to the inventory of homes for sale, which now stands at an 11.6-month supply, up from the average 8.8-month inventory seen in 2009, itself a really bad year for housing.

In addition, he said, “there’s a whole shadow inventory that no one has a good idea of where it is, how large it is.”

The shadow inventory includes homes whose owners would like to put them up for sale but cannot or won’t, either because the owners owe more than the home is worth or they are current on their loan payments but are waiting for home sales prices to improve.

“I’ve heard estimates that there may be seven million homes in the shadow inventory,” Swift said. “That’s way too large. Even half that many homes would be way too many, a large overhang that will have an impact on pricing.”

As do other economists and analysts, Swift worries that the foreclosure crisis, its swelling of housing inventory and chilling sales and lending could have very long-lasting impact.

There is concern that the foreclosure mess could have an exponential effect on the housing market by putting a possible recovery back even further than the duration of the foreclosure problem itself.

In other words, for every month that the foreclosure crisis continues - freezing sales of foreclosed homes, depressing demand and scaring lenders away from new loans - it may cause two months of delay for a recovery.

So if it takes state regulators, federal legislators and banking industry officials six months to get the foreclosure problems all sorted out - perhaps an optimistic guess - that could mean a full year delay for the beginning of a housing recovery.

($1 = €0.72)

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By: Joe Kamalick
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