by Nancy Osborne, COO of ERATE®
Sept 21, 2009 - Last week the US Treasury Department announced the financial system had stabilized and its emergency phase had now ended. Priorities for Treasury were now shifting away from a rescue phase onto a rebuilding phase. While the worst of the financial bombshells may have hit, the crisis cannot be proclaimed as “over” for there are too many minefields left to navigate. Where some improvements have been realized within the economy, it remains unclear whether the gains achieved could actually continue without the government's direct intervention, as government spending has been a key driver of this alleged recovery. It is very unlikely for any type of sustained recovery to take place unless consumer spending replaces that of government spending. Unfortunately it has been consumer spending which accounts for a whopping 70% of our nation's gross domestic product (GDP).
With credit conditions being squeezed from every direction and incomes declining as job losses are mounting, it does not seem likely that consumers will return to their care-free spending habits any time soon. Recent corporate earnings reports show that revenue appears to be in a free-fall and companies will continue to slash labor costs and sacrifice jobs in order to stay afloat. The so-called “job-less recovery” which may have been possible in previous downturns seems unlikely to gather much steam this time around due to the absence of non-wage related cash resources available to consumers. Home equity lines are being cut back as home values fall and banks attempt to reduce their liabilities. Other non-secured credit lines are being pulled back too, such as credit cards. The consumer is now severely handicapped in their access to disposable or spend-able cash flow.
The total level of delinquent and currently foreclosed upon homes is upwards of 13% and climbing. In the beginning of the foreclosure crisis, sub-prime loans were the primary culprits, now with job losses rising, prime loans are being hit. The prime mortgage market, which accounts for 2/3rds of all loans, is experiencing surging delinquency rates and now accounts 1 out of every 3 foreclosures. Still to come is another phase of adjustable rate mortgage re-sets which will begin in the 4th quarter of 2009 and will continue into 2010. Typically, these adjustable rate re-sets have been followed by yet more defaults and foreclosures.
Compounding the problem further is the drop in home values which had previously provided consumers with their source confidence and cash. It is estimated that over 25% of homeowners owe more on their homes than they are worth and it is expected that as delinquencies and foreclosure continue to rise, and flood the market with an added supply of available homes, another 15% drop could occur resulting in the unthinkable, that almost half of all US homeowners could owe more on their homes than they are worth.
This certainly appears to have the makings of a smoke and mirrors recovery that will fade away once the government backs off of its deficit-exploding spending. There is little good news to cheer about yet so be leery of talk that we have turned a corner because we still don't know what lurks around the next one. Potential impending disasters on the horizon commercial loans, losses at FHA and more funding needed to backstop the FDIC.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.