Regardless of your political leanings and regardless of your economic philosophies, much of the country will see continued rise in foreclosures for 2010, if we stay on the path we are currently on. A jobless recovery, isn’t a recovery!
The first problem is reduced tax collections. As many states are already noticing, they have brought in far less taxes than ever before due to the recessed economic conditions the country faces. These reduced tax collections will only put greater strains on these States budgets and therefore a reduction of State Government will be imminent. A recent example of this is the 25 states that have run out of unemployment insurance and are now borrowing upwards of 24 billion from the Fed in interest free loans. Even though they are borrowing the money, many states will have no choice but to reduce unemployment benefits to individuals so that they will have money to cover the expected increased number of the unemployed.
Secondly, a reduction of unemployment benefits does nothing to help individuals maintain homeownership. Many, if not all Loan Modifications are now considering unemployment benefits as income. This was a necessary change in strategy because of the Government mandate to keep 500,000 people in their home by end of 2009. In other words, banks and lenders had to lessen their lending guidelines to consider unemployment benefits as income in order to stay in lock step with the White House Mandate to “save” 500,000 homeowners from foreclosure. With less government subsidy in the form of unemployment insurance to individuals we can expect one of two outcomes. Either the government wises up and stops putting these politically motivated mandates on our lending institutions and gives them the autonomy to handle these situations as they deem best or, we can expect more mandates, more government influence, more subsidies and in return higher taxes to pay for it all.
Thirdly, we have got to reduce the Loan Modification Default Rate. It is no surprise to me that people default out of loan mod’s by 73-76% in 3-6 months. I am surprised when people can’t seem to figure out why this is happening. In my experience, the majority of these loan mod defaults is because of reduced or completely eliminated standards in order to be approved for a loan mod in the first place. When we reduce or eliminate any standard to be approved, we deceive ourselves as to the real financial picture of the homeowner and ultimately are only delaying the inevitable. The proof is in the numbers, how can any one call a 73% default rate a success………?
Fourthly, we need to have a reduction of Government interference. To gain a true appreciation for less government influence, I challenge each and everyone who reads this blog to take a very close and critical look at the Community Reinvestment Act of 1977. Back in 1977 Congress passed this act in an effort to reduce discriminatory credit practices against low-income people. It was this Act that introduced Sub-Prime to the country. It has gone through several changes in it’s time, most notably in 1989 when George H.W. Bush, after the S&L Crisis, agreed with Congress that more PUBLIC oversight of lenders was necessary and they introduced CRA Ratings. This allowed special interest groups to basically grade lenders and banks as to how well they provided lending to their local communities. These ratings had consequences so, if your bank got a low grade they were penalized with inspections, fees and direct government interference. Ben Bernanke himself said, “This law greatly increased the ability of advocacy groups….to perform more sophisticated, quantitative analyses of banks’ records, thereby INFLUENCING THE LENDING POLICIES OF BANKS.” Who in their right mind wants an advocacy group or anyone else for that matter greatly influencing your banks lending practices? Does this sound right? Needless to say, the CRA went through a couple more changes, giving more and more power to special interest and in return, forcing banks and lenders to loosen or even eliminate credit standards, remember the NINJA loan, No Income No Job, Accepted. My point is, less government influence because government influence comes with special interest and that is corrupt!
Fifthly, we need to reduce small business operating cost. Small business counts for almost three quarters of business in America. If we can reduce the cost burden on these businesses we leave more money in their pocket. More money in the pocket of a small business gives them financial security and with that comes innovation, higher pay, increased benefits and increased production. I believe that if given a choice, most people would rather have a job than a government check.
Sixth need is a reduction of housing inventory. Price’s will only go up when we have less supply, even if the demand stays the same. You don’t reduce inventory by keeping people who can’t afford the home, in the home. Have we not learned this lesson yet? People who can’t afford the home need to go through a disposition method that gives them an incentive to protect the asset / home and gives them the ability to obtain temporary housing or an apartment. Some banks are doing this now in the form of Cash for Keys negotiations and Short Sales but, in my opinion, it isn’t happening enough.
In the end, just changing one of these 6 points I made would have a huge impact on housing for 2010. I hope we, as a Country, wise up and make the changes necessary before we go down a path of imminent bankruptcy…..it is possible.