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Mortgage Foreclosures May Undermine Economy

Fri, Jun 12 2009, 05:41 GMT
by Comstock Partners Team

Comstock Partners Inc.

A looming rise in foreclosures is likely to keep home prices under continuing pressure and smother the so-called green shoots that have been boosting the stock market. Although new foreclosures in May were down 6% from April, it was still the third worst month on record and the third in a row with over 300,000 new filings.
Foreclosures were also up 18% from a year earlier.
Furthermore RealityTrac expects activity to spike in the coming months as foreclosure delays and moratoria implemented a few months ago come to an end.

Confirming this view, Jay Brinkmann, chief economist of the Mortgage Bankers Association (MBA) said that "The foreclosure bucket is falling faster than it's emptying. It will continue through the next quarter at least." While the housing mess started in the subprime area the trouble is now spreading to prime loans as well. The big problem now is that with unemployment continuing to soar, more and more mortgage holders will not be able to make their monthly payments. A record 1.37% of all mortgage loans entered foreclosure in the first quarter, and 29% of these were prime fixed-rate mortgages taken out by households that were presumably able to make their monthly payments as long as they held jobs. Illustrating the severity of the situation, according to the MBA 3.85% of all mortgages are now in foreclosure.

Along these lines, JP Morgan Chase estimates 6.4 million additional foreclosures by mid-2011 with inventories of foreclosed homes not peaking until mid-2010. The prospect of a continuing rise in foreclosures mean more inventories, even lower home prices and more homeowners going under water on their homes. Importantly it also sticks the banking system with more toxic residential real estate mortgages at a time when large losses in commercial real estate mortgages are coming as well. The overall result is more pressure on a financial system and economy that is already exceedingly fragile.

The likelihood of a continued weak housing industry also leaves the economy without a catalyst for future growth.
Traditionally, housing has been a leading indicator for the economy and the way in which monetary stimulus is transmitted to the real economy. There is almost certainly no other sector ready to serve as a catalyst for growth. Consumer spending remains hobbled by excess household debt, rising unemployment and stagnant wages. With capacity usage at such a low level, a significant increase in capital expenditures seems unlikely as well. The stock market has already discounted a second half recovery and without some confirmation has nowhere to go.

Published on  Fri, Jun 12 2009, 05:42 GMT