Reuters reports that Deutche Bank projects that about half of all U.S. mortgages will exceed the value of the collateral - homes - securing those loans by 2011. Half.
That is a shocking projection that has some pretty terrible implications for our economy. First, if you think that there are a lot of foreclosures now, just wait until half of American homeowners wake up and realize that they owe more on their homes than their home is worth. Couple that with high unemployment and you have a recipe for a Super Tsunami of foreclosures.
Throw another news item in the mix - the current administration anounced that they want to break up FNMA and FHLMC - owners of well over half the mortgage paper in the country. Who will own that paper when that happens? Do you see where this is going?
I am not a conspiracy theorist. I believe, like Tolstoy (see the epilogue to War and Peace), that people will do what is in their own personal self interest. They will make decisions that make economic sense for themselves. If walking away from a home is in their best economic self interest, that is what will happen. If recent experience is any guide, it is already happening on a massive scale.
Between the large money center banks and the United States Treasury, most of the homes in the United States will end up in the hands of an institutional investor. They will control the flow of properties available to the market in an attempt to "support" home values. Do you remember the trial balloon last week the president floated of the federal government leasing foreclosed homes back to those who formerly owned them?
A good analogy would be farm subsidies. They work by taking productive farmland and other capital assets out of production to restrict supply. It is a command and control scheme. While it does achieve the goal of providing higher prices for agricultural producers (who, by the way are no longer small sole proprietorships, but huge corporations - thing Archer Daniel Midland), ask the millions of starving people in the world how that is working for them.
I believe that had the government done the right, legal, morally correct and constitutional thing and let foreclosures occur in their natural order, we would already be seeing a decline in foreclosures and a more robust uptick in home prices. Private investors would be buying those homes and renting them to families - reducing rents due to the supply of rental homes and allowing those same families to get their financial house in order. How well maintained will those "federally owned" homes be? Do you really think that having federally owned rental properties in your neighborhood is going to be good for property values?
By delaying foreclosure and picking "winners and losers," the government has rewarded economic failure and penalized people who lived up to their contractual obligations. These same people will now understand the folly of their ways, and will walk away from those obligations when they realize there is no economic reward to paying off mortgages on their homes when the home is not worth the principal balance remaining on their loan.
People will make interest payments if there is a reasonable amount of appreciation in their home over time. Without appreciation, there is little point to doing so. Implicit in Deutche Bank's projection is a continuing slide in home prices. It makes you wonder whether we really have hit the bottom of the hole. I hope that we have, but I don't really know - and no one else does either - where all of this will end. My - and your - livelihood depends on it.
Comments(0)