“This mess is far from over.”

That’s what it looks like. Conisder the following from Bloomberg on July 10:

“The foreclosure problem is getting worse and will stay with us well into the next decade,” Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pennsylvania, said in an interview. “The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you’ve got negative equity, and you’re more likely to give up your house if you’re deeply underwater.”

Foreclosure activity is the highest since the Great Depression of the 1930s, said Rick Sharga, RealtyTrac’s vice president of marketing. Home prices, which fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas, have created a cycle where shrinking equity drives homeowners into foreclosure, which in turn further pushes down home prices, Sharga said.

1 Million Homes

“We’ll have 1 million bank-owned properties by the end of the year,” Sharga said in an interview. “That will represent between one-fourth and one-third of all home sales.”

About 53 percent of borrowers with subprime loans, those with poor or incomplete credit histories, will have negative equity in their homes at the end of the year, and the number will rise to 63 percent in 2009, New York-based analysts at Credit Suisse led by Rod Dubitsky said in an April 23 report.

Tighter underwriting standards mean borrowers whose adjustable-rate mortgages reset to higher payments can’t refinance their loans, Credit Suisse said. About 2.7 million subprime borrowers will enter the foreclosure process by the end of 2012, with a peak of new foreclosures in the third quarter this year, the analysts said.

About $3.5 trillion in homeowner equity has been wiped out since the spring of 2006, when housing prices were at their peak, Zandi said.

Glut

Rising mortgage defaults and auctions of foreclosed properties are adding to a glut of unsold homes and prolonging the housing slump. Efforts by the U.S. Congress to insure as much as $300 billion in refinanced mortgages and save up to 2 million borrowers from foreclosure can work only by “slowing down or reversing home price declines and equity deterioration,” Credit Suisse said.

“Foreclosures Rose 53% in June, Bank Seizures Tripled (Update3)”
Dan Levy
Bloomberg, July 10, 2008