Negative Home Equity, Big Banks and Washington

by Don Azarias
August 20, 2011
In a compelling report by the Federal Reserve, it shows that falling real estate prices are diminishing home equity. The average homeowner now has 38 percent equity, down from 61 percent a decade ago. Before the credit crunch, the number of people in negative equity was “negligible”.  

As a rule, home equity rises as you pay down the mortgage. But the value of homes throughout the United States has been on a downward spiral since the bubble in real estate prices burst in 2006. As a result, many homeowners are losing equity even though the outstanding balance on the loan is getting smaller.

Home equity is important for the economy because it gives homeowners financial security and flexibility to spend freely on other things. Home equity also serves as collateral for some loans. Normally, greater wealth would spark consumer spending. But the negative home equity on a large number of American homes continues to exacerbate the crisis in the housing market.
Although fixed mortgage rates are currently averaging 4.49 percent, extremely low by historical standards, it still hasn’t provided the needed lift for the depressed housing market. Why? It’s because most people can’t meet tougher lending requirements. That’s why even with falling rates many people are still unable to purchase new homes or refinance their current mortgage. Those three largest banks——Bank of America, Wells Fargo and JPMorgan Chase——haven’t helped enough people lower the monthly mortgage payments to stay in their homes. And these big banks were bailed out by the American taxpayers at the height of the Great Recession. If they are not what we call ingrates, then I don’t know what to call them.

There are 74.5 million homeowners in the United States. An estimated 60 percent have a mortgage. The rest have either paid off the loan or bought with cash. Of the people who have mortgages, 23 percent are “under water,” meaning they owe more on the mortgage than their home is worth. Consequently, those homeowners have negative equity in their homes. And that’s one of the many reasons why the outlook for the housing market remains dim. Why is this happening?

While the Obama administration had established the Home Affordable Modification Program (HAMP), that gives lenders cash incentives to work out with homeowners in lowering their monthly mortgage payment, it’s still hasn’t brought down the high number of foreclosures being initiated by those major banks who had benefited from taxpayers-funded bailouts at the height of the Great Recession. The administration had originally projected that the program would prevent as many as 4 million foreclosures but, so far, it has helped fewer than 700,000 homeowners.

It’s such an insult to the taxpayers who had to bail out those banks that made bad loans that caused the housing market to crash. And it’s even outrageous that those banks and other Wall Street financial institutions are being rewarded for their risky and reckless behavior, while those taxpaying homeowners are losing their jobs and homes. 

Foreclosures have economic ripples: Homes in foreclosure sell at a 20 percent discount on average, and those discounts erode prices throughout a neighborhood. The supply of unsold homes on the market keeps getting bigger. At the same time, the growing number of foreclosures keeps pushing down home prices and scaring potential buyers and sellers from the market.

The housing sector remains the weakest part of the U.S. economy. Sales of new homes have declined 18 percent in the nearly two years since the Great Recession ended. Last year, Americans bought the fewest number of new homes on records going back 47 years. High unemployment, tight credit and a lingering fear that prices will fall further have discouraged many would-be buyers.

There are also concerns about the high gas prices which have contributed to a slowdown in big purchases by consumers. And let us not forget the impact of the European Union’s lingering debt crisis. All of these factors are causing the loss of homeowners’ equity on their homes. The Fed report also found that corporations are still hoarding cash and are reluctant to hire workers resulting in stunted job growth made worse by the Great Recession. The unemployment rate is 9.1 percent, slightly higher than when the year began.

The Fed report showed household debt declined at an annual rate of 2 percent from the previous quarter, mostly because of a decline in mortgage debt, which has fallen for 12 straight quarters. But the decline is deceiving. Mortgage debt is coming down because so many Americans are defaulting on payments and losing their homes to foreclosure, not just because people are paying off loans. There were also some reports that suggest home foreclosures are slowing down in some states. They turned out to be inaccurate because backlogs in state courts were not taken into consideration.

In the midst of the housing crisis, it’s quite refreshing to note that new-home purchases rose in every region earlier this year, after severe winter weather had hammered many areas during winter. Sales jumped more than 15 percent in the West, 7.7 percent in the Northeast, nearly 5 percent in the Midwest and more than 4 percent in the South. Also, shares of home construction  companies rallied briefly after the report on new-home sales suggested that builders might step up construction. But stocks quickly fell on concerns over Europe’s lingering debt crisis which continues to bedevil not only the United States’ but also the global economy.

It would also be worthwhile for us to know there are still lots of bad debts and toxic holdings in the books of major lenders and financial institutions that still have to be liquidated. Some of those lenders who are no longer around and whose assets had been taken over by other financial institutions for pennies on the dollar in the bankruptcy process continue to wreak havoc on the economy. Until those toxic assets are gone, the financial market will have a difficult time recovering from this economic downturn. 

It’s obvious that those political leaders in Washington, D.C. are not doing the job that they were elected to do. After almost four years, the central question is whether Obama is capable of leading the United States out of economic turmoil. He had his chance and I don’t want to take another chance on him. Come 2012 let’s clear the nation’s capital of those toxic politicians. And that includes Obama. 
Don Azarias 

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