CHESSNOID

The source of our severe recession originated from our housing bubble which burst.  It took over 5 years to inflate and many layers were added with the fancy securities created from it and sold here and overseas.  That is why banks of different countries are suffering.  They bought bad investments with poor security.  Anyways, the housing situation has not bottomed yet and is still in a downtrend.

Nov. 13 (Bloomberg) –

More than a quarter million U.S. households received a foreclosure filing in October even as state laws designed to protect property owners from losing their homes slowed the pace of defaults, RealtyTrac Inc. said.

A total of 279,561 properties got a default notice, were warned of a pending auction or were foreclosed on, the Irvine, California-based seller of default data said today. Filings rose 25 percent from a year earlier, an improvement from average monthly gains of about 50 percent this year, after California passed a law delaying foreclosures for some borrowers.

Banks and states have moved to halt defaults as the economic outlook has worsened with climbing unemployment and a relentless fall in home prices. The U.S. jobless rate rose to 6.5 percent, the highest since 1994, and payrolls dropped for the 10th straight month in October, the Labor Department said last week. Home prices in 20 cities declined at the fastest pace on record in August and have fallen every month since January 2007, according to the S&P/Case-Shiller home-price index.

“The apparent slowing of foreclosure activity understates the severity of the foreclosure problem,” RealtyTrac Chief Executive Officer James Saccacio said in a statement. “The net effect may be merely delaying inevitable foreclosures” should banks and the government fail to adopt a unified approach on mortgage modifications, he said.

The correction of housing prices is connected to the loans people can actually afford relative to their incomes. Now that all the exotic mortgages are gone and lending requirements are tighter, houses will just not sell at the inflated values they were originally purchased in the last 3 years.

We do have a recession with people being laid off, hours being cut, and everything seems more expensive overall, but one reason not focused on these foreclosures is that many people don’t want to hold on to a depreciating asset. Especially when these companies are being bailed out.

Even if it is the home you live in and not just an investment, it is difficult to justify paying on a $500,000 loan on a property that might be worth only $300,000.  It will take a long time if you are the homeowner to see your house go back to that value if at all.  The other problem is the moral hazard issue where the government wants to help those delinquent on their mortgages stay in their house by giving them special breaks.  The government wants to cut mortgages and reduce interest rates and monthly payments on people in foreclosure.  In a sense you reward those who fail and punish those who succeed.

If the government wants to help, then they need to be fair.  You don’t create incentive for those who are paying on time to stay in their homes when you give $200,000 discounts on the mortgages of those who are behind. It is not gaming the system to want fairness.  People will default on purpose to make the playing field even and get the same benefits. Everyone deserves the same discount regardless of their situation.

Overall, I really wish the government just let the economy work itself out.  This recession didn’t have to be severe.  When the Federal Reserve’s Bernanke played with interest rates and the US Treasury’s Paulson started printing up more money, they created inflation that drove oil to record highs.  The economy was doomed at that point to crash hard.  It was foolish of them to try to prop up the housing market and stock market when both markets needed to correct and just simply squeeze out the excesses built up over the years.  That is the way the economy works if you leave it alone.