Walkaway Foreclosures

The World Economy
The relationship between world economies could be dramatically seen in recent days with the instability in Egypt and the effect on U.S. markets. On Friday, January 28^th, the Dow Jones dropped 166 points and the NASDAQ dropped by more than 68 points, a substantial drop. The sheer size of the Egyptian economy, and the country’s close ties to the U.S., factored into this response as seen in the markets. That same instability caused investors globally to seek the safety of the U.S. dollar and Japanese Yen. The country’s control of shipping channels was a concern that led to an increase in the price of a barrel of oil.

If it happens there, it is felt here
What happens thousands of miles from home can have a dramatic effect on local securities markets that affect us all. When the stock market is down, it’s not uncommon for 401k plan balances and IRA balances to be down also. When the price of a barrel of oil goes up, Americans can expect the same at the gas pump. We looked at this relationship with China and its impact on the U.S. economy. The foreclosure crisis in the U.S. affected the global economy and events in Egypt and China impact the day-to-day lives of average Americans.

For people living in other countries outside the U.S., much of the recent turmoil in places like Tunisia and Egypt had much to do with food prices. The bad flood that residents in Australia have experienced in recent weeks can affect food crops there and by extension, the consumers in other countries that purchase those foods. Greater demand for food, in countries like China, where discretionary spending has increased, has meant that the global supply of food is decreasing.

It becomes easier to imagine that the sub-prime mortgage crisis, that has impacted U.S. residents, can and did have consequences far beyond our shores.

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Optimism for 2011
In a recent article in the Financial Times, the focus was on new projections from the International Monetary Fund for the world economy in 2011. Those projections said that the most recent stimulus would cause a number of problems for the U.S. in the future. The more optimistic portion of the report said that the U.S. economy would grow by 3%. That is actually a slight improvement over a previous prediction. The extension of the Bush tax-cuts is what gave the fund more reason for optimism.

A projection for 2011 by the firm BlackRock looks for improvement in the unemployment numbers during the year with the U.S. economy creating 2 to 3 million new jobs. They predict unemployment falling to 9%, a number that is still too high, but a slight improvement. The firm’s predictions also include the suggestion that consumers will continue spending as they did during the recent holiday period.

The firm also predicts that real GDP (gross domestic product) will hit a record high. GDP is the value of goods and services produced in the U.S. At least the numbers reported to the government. They also look for more of a shift from bonds to stock. One area that they include in their report that is playing out currently is the prediction that Washington (meaning the House in this case) will begin to address the “fundamental debt and budget problems.”

Now the Potential Downside
Unfortunately, the report also details what could go wrong during the year. One prediction is that credit problems could resurface. This would include states and municipalities, as well as the housing market. The credit market was at the center of the problems that precipitated the recession. Another concern is that commodity prices increase.

Another wildcard is inflation. The net effect of this would be that consumers would stop spending and hoard money. It would also cause investors to leave the equities markets and head for cash. If interest rates rise, any housing recovery is doomed. A marginal rise is expected but anything more could blind-side the economy.

We saw a tech bubble burst in 2000 and we could see an emerging markets bubble burst this year.

Foreclosures Last Year
Realtytrac recently published its market report covering the foreclosure market for the past year. The report showed that there were 3,825,637 foreclosure filings in 2010. According to the report, this represented a 23% increase over 2008 and a 2% increase over 2009. The top foreclosure cities, according to the report were; Las Vegas, Chicago, Phoenix, Miami and L.A. Some similar numbers were covered in our January 7^th posting.

A vice president with Realtytrac explains that there is a difference in the current foreclosure market. He explains that most foreclosures used to be a result of “toxic” loans. He said that today, there are many more “plain vanilla” loans that are foreclosing because people are “not getting a paycheck.” He said that for every 6-10 jobs lost, there is one resulting foreclosure. As a result, the homeownership rate has dropped considerably.

Washington Spending
Our previous post about China actually plays into the chances that we will experience a housing recovery.  If the federal government continues on its spending spree, it will not have the ability to pay off its (our) debt. If this happens, the result can be increased interest rates.  The housing recovery, whenever it begins to happen on a large scale, will be greatly hampered by an increase in interest rates.

The federal debt is now over $14 trillion. How many generations of Americans will be straddled with this? A housing recovery and an increase in employment are needed to stave off more of the economic gloom that has been a part of the landscape the past few years.

The Economy on a Fence
Some of these numbers have caught the attention of Wall Street in recent days with the market reacting in a negative fashion after a 25% rally in recent months. Many large companies will report earnings in the week ahead. This is just one more component, along with mortgages, foreclosures, new unemployment claims, home values and a half dozen other indicators of what’s to come. Stay tuned.

Made in China
When you buy almost anything for your home, it is very likely that the tag on the bottom will tell you that it was manufactured in China. There may be a handful of other Asian countries where the item was made, but China is still the leader. It is with this consideration that the current state of world economics finds certain realities. China’s economy has had strong growth while the U.S. economy has suffered. The world’s number two economy is gaining ground on the world’s number one economy.

In a recent announcement, it was learned that China’s economy had grown 10.3% during 2010. That is more than three times the growth in the U.S. economy over the same time period. While there is still a fair amount of difference in the size of the two economies, China is gaining ground at an unsettling pace. The recent visit of China’s President Hu Jintao, and the administration’s lavish dinner for him, are signals that the U.S. depends on China in many ways.

China Impacts the Average American
Why talk about China when this blog features articles about the U.S. economy? Any discussion of China is about the U.S. economy. China is the leading holder of U.S. Treasury debt.  They hold nearly $896 billion, which surpasses Japan, the former leading buyer. Because of this, when the U.S. complains about China’s control of their currency value, China has no reason to react quickly.  They are in a position to leverage their power over the U.S. in a number of ways. Chinese products are cheaper when the Chinese Yuan’s value is kept artificially low.

The actions of the Chinese and their Treasury debt buying behavior can affect interest rates in the U.S. This is only one area where China has a direct impact on the average American. Just as we are trying to emerge from ‘the great recession,’ this powerful competitor is in a position to put us right back where we were.

The Pace of Recovery will be Slower in Some States
In an article titled, “The 5 states where Housing will Recover First,” author Steve Kerch of MarketWatch lists the reasons why he believes that those states will be North Dakota, South Dakota, Iowa, Nebraska and Oklahoma. The article also listed the five states where the author believes housing recovery will take much longer. He suggests that these states may be at the opposite end of the spectrum. Those states are Nevada, Michigan, California, Florida and Rhode Island.

Some factors that contributed to the inclusion of the recovering states were low mortgage delinquency rates, low unemployment and home price performance. The states that the author cited as most likely to lag in a recovery were assessed using factors such as high mortgage delinquency rates, high unemployment and home price declines.

California, with the third worst unemployment rate in the country and home price declines surpassing 40%, has a difficult road ahead. Only Michigan and Nevada have some numbers that look worse.

Foreclosures will Increase
Realtytrac says that this will be the biggest year for foreclosure, topping the one million mark. This blog is not in the business of bringing bad news to its readers, but facts are not always uplifting. This is all to point out that while the economy struggles to return from a great recession, there are still contributing factors that are slower to recover.

Retirement Savings Rebounding
In sharp contrast to all this doom and gloom is the stock market. The DOW sits at a 30-month high. That is good news for more than Wall Street types. Middle class people who have company-sponsored 401k plans or who have IRA’s with any exposure to the equities markets are seeing their balances increase. Seven straight weeks of gains as of this writing will provide some relief to those who invest in blue-chip stocks.

Jobs – a key component
Unemployment continues to be a central concern in the economic quagmire that has plagued the U.S. and several other countries in the past couple of years. The real numbers are startling when you factor in the thousands who have just given up on searching for work.

According to a January 7, 2011 report from the Bureau of Labor Statistics, the number of people employed part time for “economic reasons” (involuntary part-time workers) was 8.9 million. These are often people who are seeking, and would prefer full-time work, but who can’t find full-time work or who have had their hours cut.

For people who had not been actively searching for work, in the four weeks preceding the Labor Departments’ report, they are not included in the statistics. These can be people who have just simply given up.  These would be people who were actively seeking work prior to the recent period and have not had any luck. The Labor Department puts their numbers at 2.6 million.

Is there a job for me?
The Department actually further segments people in their report who are so discouraged with their job prospects that they have completely given up any hope of finding work. This number has actually increased in the January 7^th report, standing at 1.3 million.

Keep in mind that these people are not included in the unemployment numbers that you normally hear on the evening news. These are people who are either underemployed compared to where they might have been in their recent work life or they are people so discouraged with their prospects that they have thrown in the towel.

Some employment increases
The same report details an increase in non-farm payroll employment of 103,000 in December. Most of these gains were in the hospitality and leisure industry and in healthcare. Many analysts expected increases on the order of 300,000.

For the economy to really improve, these people and millions of others, need to find real, sustained work and foreclosures have to begin to abate.

The Foreclosure Fiasco
One of the leading components of the financial meltdown in the past couple of years has been the mortgage crisis. Unprecedented numbers of Americans have been upside down in their mortgages with many losing their homes. Many more have had to seek out a way to get out of a bad situation. Loan modifications and deed in lieu’s have satisfied the needs of many of these homeowners who have had nowhere else to turn. Loan modifications have often made an unaffordable mortgage; affordable.

Still, after record foreclosure rates in the last couple of years, the trend does not seem to be abating. The sheer size of the problem is part of the problem. Some studies show some easing, but those numbers may be misleading.

Many States still Suffer High Foreclosure Rates
According to RealtyTrac Trendcenter, there were 2,178,073 in November of 2010. The statistics in the report also showed that the leading states with new foreclosure activity were California, Florida, Michigan, Georgia, Texas, Illinois, Nevada, Ohio, Arizona and Pennsylvania, in that order. The other telling statistic was that one in every 492 housing units received a foreclosure notice in November.

The RealtyTrac numbers remain staggering, although they report a reduction in foreclosures in some states. Many numbers have been skewed because of the “robo-signing scandal.” This meant that a number of lenders and servicers had to review their processes and stop many foreclosures during that review. The result was a drop in foreclosures processed.

Our Economy could be Worse
As bad as the current economy seems, many financial experts believe that the actions of the Federal Reserve in 2008 helped the U.S. and Europe avoid a true depression. The Fed’s liquidity programs sought to inject liquidity into a frozen credit market. Those financial experts believe that the government downplayed the seriousness of the situation at the time and we in the U.S. were literally bankrupt. It may be hard to believe, in light of the recent economy that things could be a whole lot worse, but that may be the case.

Global Changes that Impact You
Economic cycles are often like a ping-pong ball, they go in one direction and then the other. They are controlled by outside forces with differing objectives and they impact millions of people. That last point goes beyond the analogy, but the indication is the same. The housing market, the bond market, the stock market and currency prices all impact people around the world and right here in the U.S.

The reality of these economic cycles and large-scale forces can be experienced at a very personal level through the real estate and foreclosure crisis, gas prices, the economy and jobs, consumer price increases and the increased economic power in other countries. In the end, retirement account balances, college savings, discretionary spending and quality of life can be impacted by global forces and events as well as decisions made closer to home in state and federal legislatures.

The Year that Many would Like to Forget
2010 was a case in point. It was a year when the economic cycle in the U.S. included too much uncertainty for corporations. This stymied investment and hiring.

For much of the year, discretionary spending was down and people actually saved at a greater rate than in the past. Part of the change in spending behavior found its roots in economic uncertainty as well. Unemployment was both the result of uncertainty and the impetus for more responsible savings.

Foreclosure Rates are Part of the Reality
Continued high foreclosure rates impacted communities across the U.S. with great numbers of homeowners upside down in their mortgages. A precipitous drop in home values paired with unaffordable mortgage payments impacted mortgage holders from coast to coast.

What’s ahead in this new year? We will explore that question in the weeks and months to come. We will consider all of the markets including the stock market, bond market, housing market, world currency fluctuations and new legislation. Stick around and learn about the changes that affect us all.

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When a lender forecloses on the home of a mortgage holder, the natural tendency of many homeowners is to do anything to stay in their home. After all, at some point a house becomes a home. Losing that home can mean uncertainty, taking kids out of school and away from their friends and scrambling to find alternative housing.

But in some cases, the homeowner simply wants to avoid the foreclosure process and give their home back to the bank. There are several reasons for this course of action, and some make sense.

Here are the keys…
A homeowner may not be able to afford their home any longer because of a rising ARM or a subprime loan. They may be able to take less of a hit to their credit by making an agreement with the bank to take the property back. This is called a deed in lieu of foreclosure. The homeowner signs the property back over to the lender. This can potentially keep everyone out of court.

In some cases, the homeowner may be able to arrange a short-sale. Depending on the homes current market value, the lender may agree to let the homeowner sell the home for less than the outstanding balance of their mortgage. A lot depends on the expectations that a short sale would be a success. Either choice requires a lot of paperwork.

If the lender won’t agree to these options, then a homeowner needs to investigate modifying the terms of their mortgage to make the payments affordable. This might be the only solution left when a homeowner is not able to simply walk away. Loan modification can change the terms of the loan and make it affordable.
Those in the business of loan modification know how to talk to the staff in the lending department in a language that both understand. Their efforts may be able to avoid foreclosure altogether. While walking away may seem like the easy way out, a loan modification can remove the need to do so.