Can’t hold back the rising tide
By Robert Gottliebsen
Business Spectator – 1 July 2009
With Wall Street jittery last night over a looming fall in consumer confidence, I decided this morning to go down to what I believe will be the engine room of the American consumer confidence for the remainder of 2009 – the US mortgage collection business.
I located an old American friend who has been in the US mortgage business for two decades and he warned that there could be a few unpleasant surprises ahead in the US. I suspect it’s these surprises that are making consumers jittery – and more seriously, they are not expected by Wall Street.
But first, let’s go back. The current crisis was not just about sub-prime loans. Americans were funding their consumer spending by increasing their mortgages and spending the equity in their homes. When the sub-prime crunch came there was simply not the expertise on the ground to handle the avalanche of distressed mortgages because no-one anticipated the high level of distressed mortgages.
Without such expertise to handle problem loans, the banks simply foreclosed, sold the houses and took huge losses. As they drove the housing market down by about 20 or 30 per cent in most areas, they triggered negative equity in the loans of a vast number of people. These people had often either lost jobs or had lower income. And the bank panic-selling in some regions drove house prices down to crazy levels; in areas like inner Detroit you can now buy a liveable house for around $US10,000.
Gradually, the banks and other lenders woke up to the fact that simply selling houses and driving down prices meant that they were triggering a much wider crisis. The government came in with temporary handouts to enable foreclosure moratoriums and local administrations took decisions to temporally curb foreclosures.
At the same time, the lower house prices allowed long-term investors into the market on a basis where rent covered interest costs. So in the US housing market at moment, there is some stability. And that stability is contributing to the ‘green shoots’ we are seeing in the US economy.
But behind that stability is a secondary wave of problems that is building – and those involved are becoming apprehensive.
My friend is in the business of managing distressed mortgages and he tells me that there is a rising tide of temporary moratoriums building up that could become foreclosures in coming months.
Some of the problem moratorium loans are held by banks that have deliberately held back on foreclosures; some of the moratoriums were as a result of government rules delaying foreclosures. Others have festered because the overworked processors have not got around to looking at the problems. But later this calendar year or early in 2010, a lot of the moratoriums will end and the level of foreclosures will rise.
The lenders are getting around to as many distressed situations as they can and are looking to cut a deal to keep the people in their houses. But the resources of those undertaking these deals are stretched so potentially, a lot of new foreclosures are ahead.
Because we are looking at an enormous country-wide problem, the way it is handled will govern US consumer confidence, retail spending and ultimately, the level of shares on Wall Street.
Full article here