The Background to the Foreclosure Crisis
May 29th, 2009
Profit making and greed made up the background to the present foreclosure related crisis. Inevitably it led to bursting of the bubble in 2006. The decline took up speed from 2007 continuing up to 2008. It has still not abated in 2009 and there are signs that things are getting worse.
From 2006 the prices of houses stopped increasing. It started decreasing from 2007 and has fallen by over 25% from the peak period. It meant that the owners of residential units could not refinance when their mortgage rates began to reset. This triggered off a series of defaults leading to delinquencies especially among those with sub-prime loans.
During the period stretching from the first quarter of 2006 till the third quarter of 2008, the number of foreclosures went up three times from 1% to 3%. The number of those 30 days delinquent shot up from 4.5% to 10%. The rates of foreclosure and delinquency were the highest since the time of the Great Depression. The previous high point was 6.8% in 1984 and then again in 2002. The worst is not yet over.
The early estimates of total foreclosures hovered from 3 million to 8 million. The sources were Goldman Sachs, IMF, Nuriel Roubini etc.)Roubini was the first one to predict the bursting and the recession many years ago. Till January 2009 there have been nearly 3 million foreclosures. 1 million more are 90 days delinquent and 2 million 30 days delinquent. Thus broadly speaking 6 million mortgages are under the foreclosure cloud. This counts to 12% of all the mortgages in the country. Continued recession, increasing unemployment are going to make the days darker unless effective steps are taken to contain the growing foreclosure menace.
Foreclosures mean losses for the lenders. The losses are rising and some predict it will touch $1 trillion. Due to the ailing economy there will be losses on other kinds of loans – consumer loans, credit cards, commercial real estate, corporate junk bonds etc. These will add up to another $2 trillion.
The banks will be bearing half of the total losses while the other will be suffered by non-banking financial groups like hedge and pension funds. The total bank capital of USA is $1.5 trillion. Thus losses of this immensity will wipe out nearly two thirds of the capital in the country. The blow will be felt not only by the banking sector but by the entire economy. The gravity of the situation is that the economy is dependent on the banks for loans.
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