Spring is the season of spring, of optimism and new beginnings, a good time for dreamy reveries and wishful thinking. Which means that it's a good time to talk about housing.
In late March, the Treasury Department unveiled its new foreclosure relief plan. Like the previous lackluster plan rolled out a year ago, the new program is built to fail. The premise behind it is that lenders will cut the principal of at-risk mortgages and give debtors new, federally guaranteed loans for something close to their homes' real values.
For the parts of the country hit hardest by the housing crash and the foreclosure boom, this is a pipe dream. In places like Miami (where prices are down 45 percent from their high), San Diego (close to 40 percent), or Phoenix and Las Vegas (more than 50 percent off their housing bubble peaks), lenders would have to cut loans by half to get them down to the real market values the government hopes for. There's no indication at all that lenders, who've resisted cutting mortgage principal in any way, will make these kinds of reductions, and the new government plan won’t force them to.
The new foreclosure plan does invite a question that lurks in the background of any housing discussion: Have we reached the end of the housing bust? In short, the answer is no. One of the reasons the foreclosure plan won't work is because despite recent rosy talk about housing, the housing bust is worse than ever, and even now neither banks nor policy makers are willing to confront just how bad it is.
Which is odd, because if you have been following the news from the realty and mortgage trade, you might think that it's time to pop the Champagne corks and celebrate the end of the housing crisis. The National Association of Realtors points in its latest report to “stabilizing prices,” “steadying home prices,” and “consistent price gains” in the market—a veritable potpourri of calming language. “We are likely seeing the beginning of the end of the unprecedented wave of delinquencies and foreclosures,” declares the chief economist of the Mortgage Bankers Association.” Prices are up, foreclosures are down (we'll get to that in a second): There's always a reason to be happy in mortgage land.
The dirty secret of the housing recovery, though, is that in the worst hit markets—Florida, California, Nevada, Arizona, and other places where the foreclosure boom is concentrated—there's one important number that hasn't gotten better. That's the percent of people who can't pay their mortgages. Believe it or not, that number is rising faster than ever.
Consider, for instance, California. In the first quarter of 2009, according to the Mortgage Bankers Association, banks started foreclosures on 2.15 percent of all mortgages (that is, roughly one in 50). In the last quarter—the latest period for which data are available—that was down to 1.34 percent, a sizable drop (you can see the Mortgage Bankers Association's latest report on this here).
But if you conclude from this that more folks have gotten their arms around their mortgages, think again. The number of new foreclosures may have dropped, but the number of people seriously behind on their mortgages has risen—from 4.75 percent of mortgage holders all the way up to 6.93 percent, an increase of close to 45 percent.
What's happening here? It seems to be something like this: Thanks to some combination of government pressure, genuine efforts at loan modifications, and reluctance to seize houses and try to sell them in a dismal market, banks are simply letting more debtors fall behind without foreclosing. Think of this as the foreclosure relief paradox: A small drop in foreclosures keeps some people in their homes and helps prop up the housing market, hiding the fact that borrowers are in worse shape than ever.
Look at most of the country's most dismal real estate markets, and you'll see the pattern repeated. In Arizona, the proportion of mortgages that are 90 days or more past due is up 60 percent in nine months, even as foreclosures have fallen. Same story in Nevada or Florida—really, everywhere in the foreclosure belt.
In addition, where lenders have initiated foreclosure proceedings, they have in some parts of the country been noticeably slower to actually repossess properties. In California, for instance, according to RealtyTrac, a company that monitors the foreclosed properties market, banks foreclosed on and took back 12,546 properties in February, down from 18,872 the previous February (though on this the evidence is more mixed; banks also took back fewer homes in Nevada, but more in Arizona and Florida).
The effect of this strange dynamic—rising delinquencies, falling foreclosures—seems to have been to create in the worst hit areas the “stabilization” of home prices that the Realtors' trade group is so thrilled about. A year ago I wrote that any bailout for distressed home buyers was also a rescue for lenders, saving them from being stuck with foreclosed properties they can't sell at anything close to the face value of the mortgage.
Indeed, now we are seeing exactly the appearance of a housing recovery that lenders would have hoped for. Last year, according to the authoritative Case/Shiller Home Price Index, house prices in the Miami and Phoenix fell close to 10 percent, in Las Vegas (the worst-case scenario of the housing crash) 20 percent. Essentially all of that drop came in the first three months of the year. So in the last year it looks like even the worst markets have recovered from their housing freefall.
Or maybe not. If you've had the patience to breathe steadily through your snorkel and follow along on the data-diving expedition of the last few paragraphs, it's now time to look up at the luminescent coral of the great housing market reef and consider just how much you should trust in the housing recovery.
The answer is not very much. The Realtors' association happily reports that housing prices are rising because of tightening “inventory”—the trade term for “fewer houses for sale”—but underneath this is the scary reality that there are ever more folks seriously behind on their loans and waiting for lenders to take their houses and condos. This is something that lenders are reluctant to do because they still have no one to sell them to. The housing market looks stable only because lenders are avoiding flooding it with foreclosed properties.
Which all brings us back to the latest bailout plan. Cutting borrower's mortgages to a level they can afford means bringing their principal down by 40 percent or 50 percent—-which means admitting how far the market has fallen and that it's not about to recover. Lenders won't do that. They hope that they can somehow wait out the slump and wait for prices to pop back up.
In the housing price run-up, lenders bet that prices would climb up forever. Now they hope, with similarly optimistic illogic, that prices can stabilize even as the buildup of busted mortgages continues. The first time, the lenders fooled us, and shame on them. This time? Remember the old adage: Fool me once, shame on you; fool me twice, shame on me. The mortgage bankers and realtors might say recovery is right around the corner, but shame on you if you believe that this time.
This is a great summary of why the housing market isn't really recovering in Arizona and other troubled markets. The bank got a bailout, but nothing's really been done to fix the underlying problem.