A Second Foreclosure Wave Is On Its Way
Temporary fixes to the foreclosure problem are just that, temporary, and usually late in the first place.
This was certainly the case with the loan modification programs established by banks cooperating with the Obama administration in return for the massive bailouts. “Too big to fail” applied to institutions which had already been forced to dole out subprime loans by another Democrat president and which had foundered under defaults too numerous to count. It was one disastrous policy predicated on another. But the effects were not simply on top of each other, they were compounded, just like interest on a bad refinance.
Although banks publicly present a rosy picture forecasting excellent prospects, executives behind closed doors are clearly very worried about prospects 12 to 18 months out. Loan mods did very little about principle, and interest reductions were short-term tourniquets designed to stanch bleeding from a hemorrhaging financial infrastructure. It was never intended as a permanent reshaping because top flight economic advisers like Larry Summers and John Corzine predicted recovery based on what happened under Reagan as opposed to events occurring under Roosevelt, and they weren’t the only ones.
Real estate professionals have been just as guilty, but they aren’t totally blameworthy because they were relieved that somebody was doing something in the face of calamity. And brokers and salespeople believed the market would come back as soon as the dust settled.
The real estate business did come back, inching forward first on short sales, then on foreclosure buyouts, and now on sales born of low interest rates made possible by Fed dictates. Things are pretty good in the property business, but in conference rooms, the intelligent are planning for the inevitable second wave of foreclosures, and the insightful foresee huge inventories with few American buyers. Any real estate company worth its salt is advertising in cross-border, cross-water venues.
When the loan mods expire or re-up, the seemingly fortunate will lose at a rate higher than the general public can imagine. Under-prepared borrowers were the first cast overboard because they were told by unscrupulous lenders that they qualified, and most of these clients had no idea what a subprime loan was or that even such a thing existed. Business was booming in spite of the more than expensive Twin Towers debacle, so few worried when politicians cast conditions as positive. It was part of the American “can do” attitude.
Make no mistake. The 9/11 disaster, along with lender dishonesty and subservience to wrongheaded government leads, delivered worse trauma to the financial system than regular folks either realized or were told by officials. This quick fix worked short-term, but by 2008, the confluence of events and policy collided head-on in the banking crisis that led to the TARP and stimulus programs. Seven years of inept, or at least misleading, thinking led to bills coming due with the biggest balloon payment in world history.
Limited, or perhaps unimaginative, thinking never countenanced the idea that maybe the economy might not recover within four years. The flag was passed forward to a disengaged and high-minded cadre unprepared for massive financial problems. They failed to assess, decide, or deal with the catastrophe; instead they ignored it by darning socks rather than resoling shoes, and now it looms near term with inexorable track.
The pity is that since the marginal have already defaulted and lost homes, next in line are those who struggled, did loan mods, and stayed with the program. When the rates return to pre-mod levels things will get grim for them, and it will not be interest rates that are the worry.
The market for mid-level property has already deteriorated, and there appears nothing on the horizon that will improve the condition. A huge inventory and few customers means market realignment, depressed prices, and an inevitable recession.
How did this happen?
When short-term thinking supplants long-range, delayed gratification, the only expectation is either more quick yet unsupportable “good ideas” or payment due notices. When a government ignores the creativity of its constituency, regulates for idyllic existence without paying attention to ground effects, and fails to trust the goodness of its people, said government dooms itself to a fast of Augustin-like high-minded narrowness that brought on the Dark Ages: the starvation of ideals.
What will happen?
Unless American individuals overcome a foolish swarm of elitist politicians, nothing good.