More Evidence That The Foreclosure Death Spiral Continues With Few Solutions

Even before the current mortgage paperwork crisis, foreclosures in major cities began to accelerate again. Some analysts believe that the bank debacle will exacerbate the trouble, but it is trouble enough on its own.

The theory behind foreclosure rates remains simple. People who are out of work or in distress over the drop in value of their homes either walk away from them or have them seized by banks. These foreclosed homes go on the market at discount prices which allow banks to sell them quickly. The artificially low prices bring down the amount that people in nearby areas can get for their homes. This increases the odds that holders of underwater mortgages  will stop making payments as they find themselves deeper in the hole.

The long-term unemployed, a part of the population which has grown quickly, are more likely to default and are in no position to be buyers of homes or much else.

The regions where home prices may not recover for many years are the places where economic shifts have pushed more and more people out of jobs. Many of these areas were already overbuilt in anticipation that the industries which fueled their economies would grow.  The hardest hit areas also become harder hit by the month.

RealtyTrac released its Q3 2010 Metropolitan Foreclosure Market Report, which shows that “cities in California, Florida, Nevada and Arizona once again accounted for all top 10 foreclosure rates in the third quarter among metropolitan areas with a population of 200,000 or more”. And, “California, Florida, Nevada and Arizona cities also accounted for 19 of the top 20 metro foreclosure rates.”

Among all 206 metro areas tracked in the report 133 posted year-over-year increases in foreclosure activity, and 11 of the nation’s 20 largest metro areas posted year-over-year increases.

These trends plus the possible effects of the bank foreclosure record keeping problems leaves the federal government with very few options to stanch the rapidly spreading problem. Its HAMP mortgage modification program has done little to help people who want to stay in their homes. It has, in fact, been an abysmal failure.

The Administration and Congress have been understandably reluctant to help homeowners to en masse bring down mortgages balances and thus monthly payments. Such a move would return positive home equity to some of  the 11 million homes with underwater mortgages. Aid of this sort borders on a kind of socialism and would cost taxpayers tens of billions of dollars.

But taxpayers who are also homeowners face the trouble that the housing crisis gets worse by the day.

The federal government has never had qualms about aiding various regions and companies without spreading that same aid across all of the country. GM is a prime example. So are the areas which have benefited most from the Obama $787 billion stimulus package which was not spread evenly person-by-person across the country.

Congress and the President have a chance, perhaps a one-time chance, to stop the steep drop in home prices that may lead to a new recession. The solution, as radical as it may seem, is to either buy-up residential properties in the hardest hit areas or give mortgage holders a massive incentive to cut principles and monthly payments. If the foreclosure problem is concentrated primarily in five states, it is aid to those state which could go the furthest to solving the trouble.

One of the aspects of the creation for solutions in particularly hard economic times is that risks by the government must be increased. Investments by the government in regions where real estate values are down 50% and still falling is a long shot, but it is the only one that has a reasonable chance of beginning a recovery in the real estate problem. For that reason, it is a chance worth taking.

Source: RealtyTrac

Douglas A. McIntyre

Q3 2010 Top 20 Metro Foreclosure Rates