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Our House in the Middle of Our Street is no Longer Our House

posted by Christian E. Weller

Here’s a news flash: The housing market is bad. Actually, it is really bad, historically, woefully bad. And, the bad news won’t stop coming. Housing wealth is dropping precipitously, families own ever smaller shares of their own homes, and home owners are falling behind in their mortgages in record numbers.

According to data from the Federal Reserve, housing wealth has taken a nose dive for two years. In December 2006, housing values reached a peak of $18.9 trillion (in 2008 dollars). By December 2008, they had fallen by $3.9 trillion to $15.1 trillion.

This reflects a historically fast depreciation of housing wealth. Over the past two years, real housing wealth dropped by 20.5%, a record for any two-year period since 1952. In fact, before this crisis occurred, there had never been a two-year period when real housing value fell by more than six percent. 

The large losses are exacerbated by the enormous leverage of homeowners, i.e. they were drowning in debt. When the crisis started, declines in the value of homhomes thus quickly translated into much larger losses in home equity. From December 2006 to December 2008, real home equity for all families decreased by 37.9%. Prior to this crisis, home equity never fell more than 10% during any two-year period since 1952.

Wealth is a store of future income. It is thus relevant to compare current wealth with current income. By December 2008, home equity relative to after-tax income had decreased to 74.0%, the lowest level since September 1967. The housing crises of the early 1970s, the early 1980s and early 1990s look tame in comparison to the current turmoil.

And, the sharp decrease in home equity has fed into the larger financial and economic crisis. The share of home equity relative to house values had dropped to 43% by December 2008, meaning that the bank owned the other 57%. Every month the bank owns a slightly larger share of families’ homes because home equity is falling faster than house values. No wonder many homeowners don’t feel it’s worth their financial sacrifices to continue paying their mortgage just so that the bank can increase its hold on their homes. According to the Mortgage Bankers Association, one in nine mortgages was either delinquent – thirty days late with their payments – or in foreclosure in the fourth quarter of 2008. These foreclosures, though, will translate into further home equity losses as more increasing numbers of homes are sold at fire sale auctions.

The housing market problem has already spread to almost every corner of the economy. If we want to stop the blood letting in the real estate market, we need to help homeowners to keep their homes. Otherwise, the vicious cycle in the housing market will continue.

Comments

The whole debate on what do about underwater consumer mortgages is missing a key component: the anti-deficiency statutes. They were enacted by many states after the great depression and should be broadened in this environment. Generally, those statutes provide that a foreclosing lender is limited to the proceeds obtained from the sale of the collateral. Civil Procedure Code Section 580b is California’s model of an anti-deficiency statute. The expressed intent of the statute was to place the risk of security on the lender including, specifically, the risk of an economic downturn reducing the value of the security. I understand that it is fairly typical of other states’ legislation, but I am not sure.

Anyway, the anti-deficiency laws certainly come into play in the current situation. However, it seems to me, that they can and should be broadened to have more application by doing away with the provisions that state it applies only to purchase money mortgages. I think that is an anachronism written into the laws when people got a mortgage and kept it until it was paid off. To my mind, the risk of inadequate security should remain with the lender whether a loan is purchase money or not. I see no difference in the relative positions of the parties. Perhaps, much of the current economic problems could have been avoided had the lenders been more clearly made responsible for evaluating their security.

Anyway, this is something that I would like to see evaluated and you seemed like a person who might be interested in doing so. If not, I nonetheless thank you for your time and the work you have done on consumer and debt issues.

Oops, that last line on the above post should not be there -- it was a remnant from another message.

Is the loss of home equity causing loan defaults? If you had the ability to make your mortgage payments when you had equity, you should be able to make your payments without equity. Loss of income would seem to be the primary cause of losing your house.

This link says the following states are the ones with anti-deficiency statutes:

http://www.helocbasics.com/list-of-non-recourse-mortgage-states-and-anti-deficiency-statutes/

Anti-Deficiency / Non-Recourse States

Alaska

Arizona

California

Connecticut

Florida

Idaho

Minnesota

North Carolina

North Dakota

Texas

Utah

Washington


The "one-action" states are also listed at the same link.

"anti-deficiency statutes"... Interesting concept. This might be just one more way to help ensure that the foreclosing note holders/servicers actually make ANY effort (note I refuse to acknowledge any effort at this time) to obtain anything even remotely close to FMV of a property being auctioned. This is how foreclosing entities were making money hand over fist during the upside of the bubble for the last 6-7 years.

Note holders/servicers would purchase properties for, at most, the outstanding borrower debt on their books. This, I suspect, is part of why servicers kept piling on fees, at least on their books and, more importantly on the borrowers monthly statements - to eat up equity. Whether the fees were legit or not made no difference especially if a servicer was given right of first refusal to purchase a note/property in default/FC.

At auction, ownership passes from borrower to note holder/servicer for the outstanding debt upon successful bid. If it's $50k of debt on their books and FMV (read borrower's equity) on the property is $150k, borrower loses/note holder/servicer conceivably gains $100k in equity. This very concept is one of the reasons why Florida auctioneers discouraging bidders and purchasing foreclosures for $100 at auction is simply so egregious.

Maybe stronger anti-deficiency statutes would help motivate things a bit...Especially since note holders/servicers have already potentially recovered up to 3x the value of the note by the time a property goes to auction through 1.)"note insurance" claims on the tranche, 2.)pmi claims if pmi insurance existed, and 3.) any payments that a borrower may have made in order to attempt to cure the default/foreclosure.

What is this housing wealth that is allegedly disappearing? Can someone really be said to have "lost" wealth that was arguably illusory to begin with, i.e., the spurious and transient result of aberrant market conditions? To say the housing market is bad now is to say that the bubble was good. I would disagree; I say the market is returning to normal after years of crazy distortions. The fact that some people (a lot of people) are getting burned by the crazy doesn't mean there's anything wrong with the housing market now. Sure, some people are worried the market will "overcorrect," but that's what gives buyers the incentive to get back into the market and buy.

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