Record Foreclosures

More bad news coming in regarding foreclosure levels. This Reuters report that Home foreclosures reach record high is more bad news on top of previously bad news on the unemployment rate. Lets take a look -

Home foreclosures and the rate of homes entering foreclosure rose to record highs in the second quarter, the Mortgage Bankers Association said on Friday.

"The national foreclosure numbers continue to be driven by the hardest-hit states continuing to get much worse," Jay Brinkmann, the association's chief economist and senior vice president for research and economics, said in a news release.

The increases in foreclosures in California and Florida overwhelmed improvements in states such as Texas, Massachusetts and Maryland, he said.

"It is unsurprising that mortgage delinquencies picked up further in the second quarter," John Ryding, chief economist, and Conrad DeQuadros, senior economist, at RDQ Economics in New York, said in commentary.

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The U.S. mortgage delinquency rate of 6.41 percent was the highest since at least 1979, which was when the trade group began its current method of measuring failing home loans.

That is going to hurt. But note the good news of improvements in Maryland, Mass. and Texas. Hopefully this is the peak and things start declining. Hopefully, but with the Option ARM issues things will probably still get worse before they get better.

Option Arm Trouble Ahead - Proceed with Caution

The trouble surrounding Option ARMs or pick-a-payments are coming. Unlike regular ARMs where holding down the interest rates to very low levels can post-pone the troubles that luxury is not available to Option ARMs. With huge numbers not even able to make a full ARM payment and routinely having negative amortizing loans things will get very ugly. And no quick fixes are really available to resolve the upcoming issues. This article from CNBC titled ARM Resets: Tsunami Ahead gives the same warning that we have here and here. Lets take a look at the article -

Last year, everyone was worried that the resets on subprime loans would force borrowers into higher interest rates and payments. This element of the housing slide and credit crunch has subsided a bit. Akiva Dickstein, Managing Director of Fixed Income Research at Merrill Lynch explained, "Subprime and ARMs have become less of a problem recently because short rates have come down so much. If the Fed decides to raise rates the issue will return. However, even without reset difficulties, subprime and Alt-A loans are slipping into default at very high rates. The concern about future resets has given way to concern about borrowers equity erosion."

However, the Option ARMs and Interest Only (IOs) loans scheduled to reset in the next few years will add more trouble. These loans represent about 15% of securitized loans and some have negatively amortized, increasing the payments and making refinancing more difficult. According to data from Barclay's, about $300 billion in option ARMs and $820 billion in IO's are set to recast. The results could be payment shocks over 80% for option ARMs and over 60% for IOs according to Barclay's.

So when things are "moderating", it appears to only be for the time being. Does this mean that the home builders like Toll Brothers, Pulte Homes or Centex will fall more? Not according to Jim Cramer. Cramer projects a housing bottom by June, and recommended the Housing Index as a way to play the sector. Either way, over the coming quarters, pay attention to news from these builders as well as the Financials including banks like Citigroup and the GSE's, Freddie and Fannie.

While the positive spin at the end tries to down-play some of the forthcoming problems, the graph that is included in the article does nor present the same optimistic outlook.

Option ARM Recast and Payment Shock Forecast

This will be a huge problem that will be difficult to address. And the problems created with the recasts will reverberate throughout the country.

Cash for Closing Equity Lines

Here is a story we have heard before - a lender offering cash to close an equity line. This article from CNN Money titled National City Offers Customers Cash to Cut Equity Lines illustrates another example. Lets take a look -

National City Corp. , which is among the U.S. banks hit hardest by the subprime crisis, is trying to reduce its exposure to some home loans by offering customers cash to close their untapped home equity lines, the Financial Times reported.

The bank is offering to waive closure fees and write customers a $200 check to close "open-ended" home equity lines - which are committed but as yet undrawn - the FT reported on its Web site late Wednesday, citing National City.

The program in essence buys back the borrower's right to access the line and reduces the bank's exposure to lending money against houses that have fallen in value, the FT said.

Actually this seems like a smart way of handling a difficult situation. They are giving money to people who had probably had no intention of using the funds. They are not just closing lines recklessly - opening themselves up to future lawsuits and angry customers.

We have to give National City a thumbs up for handling the situation in such a professional and well thought out manner. Hopefully other lenders follow-up their lead rather than just more cutting across the board.

Shutting down those HELOCs

During the Great Housing Bubble HELOCs were all the rage. It was almost like free money - your house was providing a second income. When the bills came due people could just refinance and put those bills off for years. But with the bust that money is no longer available. This article from the South Jersey Courier-Post titled Drop in housing values affect home equity loans discusses the near universal shut down of HELOC lines that have accompanied the housing bust.

The Office of Thrift Supervision, which supervises savings associations and their holding companies, has warned institutions that if they curtail or terminate a home equity line of credit, the action must comply with federal laws and rules designed to protect customers, including regulations covered in the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act and the OTS nondiscrimination rule.

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For example, with limited exceptions, Regulation Z of the Truth in Lending Act prohibits creditors from terminating a home equity line of credit and then accelerating repayment of the outstanding balance. Exceptions include situations in which the borrower fraudulently got the loan or failed to repay according to the terms of the loan.

Additionally, under Regulation Z, a lender can't just reduce or suspend access to a line of credit without cause, said Montrice Godard Yakimov, managing director for compliance and consumer protection for the OTS.

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"There are clearly rules that apply when an institution wants to suspend or reduce an equity line of credit," Godard Yakimov said. "Our goal in issuing the guidance was to bring all those rules together in one place."

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As housing prices rose, people began to lean on this line of credit too heavily. For too many people, their home's equity was just too tempting not to touch. They used this debt to pay off other debt such as a car loan. They used it to invest in a business, take vacations or pay for college expenses.

As we discussed here and here lenders have to take care in how they shut down HELOCs. They can not just red line areas that have falling home prices. There are procedures that must be followed.

The lenders are in a tight spot - either shut down HELOCs and potentially face lawsuits or leave them open and potentially lose all that money. A tough choice that resulted from past careless decisions.

Housing and Retirement

During the boom everyone seemed rich. The thought was just sell your house and take your big pot of money. Remember house prices only went one way. The investment seemed like a sure thing. Sure enough to bet your retirement on. Although the gamble did not come out as many had expected. Instead of ending up wealthy many are in trouble. This CNN Money article titled How the housing crash hurts your retirement illustrates some of the problems with counting your home as part of your retirement income. Lets take a look -

According to a recent report from the Center for Economic and Policy Research, a Washington, D.C. think tank, the collapse of house prices that started in 2006 has wiped out more than $4 trillion in home equity, putting a sizable dent in the net worth of millions of baby boomers.

Among its more ominous findings: By next year, the average net worth of households headed by homeowners age 45 to 54 will be almost 25% less than it was in 2004.

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The housing bubble had another perverse effect on our planning: It led us to save less. "Many people thought, 'I'm wealthier, I already have a big chunk of my nest egg thanks to my house, so I don't have to save as much,' " says Moody's Economy.com chief economist Mark Zandi.

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Many homeowners exacerbated the damage done by falling prices by borrowing heavily from their homes. Federal Reserve economist James Kennedy estimates that from 2002 through 2007 owners pulled $2.5 trillion in equity out of their homes via cash-out refinancings and home-equity loans.

That's nearly a third of the increase in home values over that period. While there are many valid reasons to borrow against your home, it can also be comforting to know that your home equity will be there later in life for emergencies.

Feeling rich led to cashing out one's equity. Now the equity is long gone but the money borrowed is still owed. It seems that some people really believed that the double digit gains would continue forever and they would be rich, rich, rich. As we know now that did not happen, not even close.

Silver Linings

Nice to see a silver lining article once in a while. Just when everything looks bad we learn that there are some good aspects to the recession. Less money, no equity and job instability will overall lead to a healthier nation. That is the advice brought to us from the Baltimore Sun. In an article titled Recessions can improve public health that originated in the Los Angeles Times. Lets take a look -

As more people watch their home equity erode, put off retirement because their nest eggs are taking a dive, and bike or bus to work to save gas money, many are thanking their lucky stars that they still have a job to commute to.

Unstable times breed worry and stress, so there should be worry and stress aplenty right now. Nearly 8 in 10 Americans believe the country is headed in the wrong direction, according to a Gallup poll in August, and with the national unemployment rate up to 5.7% in July -- make that 7.3% in California -- millions of gainfully still-employed people who thought they were safe and secure might fear a Dickensian poorhouse closing in on them.

You'd think that the health of the nation would suffer as well, what with emotional stress and less money for medical appointments, gym memberships and healthful food. And in certain ways, health does worsen in times of economic uncertainty. Medical science has accumulated a solid body of research showing that poverty and unemployment lead to higher rates of obesity and more cases of diabetes, asthma, kidney disease, cardiovascular disease, some cancers -- the list goes on.

But strange as it may seem, bad times can also be good for health. Forget individual health for a minute. This is about the macro picture, the health of entire societies. And there statistics show that as economics worsen, traffic accidents go down, as do industrial accidents, obesity, alcohol consumption and smoking. Population-wide, even deaths from heart disease go down during recessions.

"Deaths go down when unemployment goes up," says Christopher J. Ruhm, professor of economics at the University of North Carolina at Greensboro, who for the last few years has been publishing counter intuitive and controversial papers on the economy and health. Put total mortality numbers on a spreadsheet, he's found, and the population's physical well-being improves as just about every measure of economic health dips.

No money for steaks, cigarettes, alcohol and gas makes one healthier. You may be miserable but you will be around longer!