Bankruptcy & Foreclosures

President Bush may finally have stopped denying that the economy is in fact in trouble, he announced Monday that he still strongly apposes any homeowner rescue legislations that would bail out lenders as well as customers.

This news comes as the Senate struggles to complete a bipartisan bill to assist borrowers in trouble through government backed mortgages. The trouble is that the money has to come from somewhere and in this case Uncle Sam would be forced to tap into funds that were established to help the poor.

Although the President didn’t comment directly on the proposal, he has in the past threatened to veto a House version of the bill, which aims to prevent foreclosures by having the government insure some $300 billion in new mortgages. While the president makes it clear that he’s opposed to laws that would bail out the lenders, he has been pushing Congress to pass legislation that more tightly regulates government sponsored lending institutions Fannie Mae and Freddie Mac.

Apologies to wishful thinkers, the Bush administration reiterated the fact that it’s still far too early to start talking about a second economic stimulus package (which many Democrats in Congress are currently pushing for in effort to help Americans battle rising fuel and food costs).

The Senate’s bill (which reached agreement on Monday) looks to tap into Fannie Mae and Freddie Mac’s profits to pay for the foreclosure-prevention program.

As foreclosures continue to mount in record-setting fashion, our friends on Capital Hill once again gathered to discuss what, if anything can be done to combat this disturbing trend. Lawmakers seek some kind of revolutionary new program to reverse the situation but the Bush Administration holds strong in claiming the existing FHASecure plan is up to the task.

For those unfamiliar (or in need of a refresher) FHASecure was launched back in August and has given subprime borrowers the option to switch to a low fixed-rate mortgage once they’ve fallen behind on payments because their adjustable rate mortgages took a rate hike. The program rewarded the responsible by offered a refinance option to individuals with strong credit histories who display a pattern of paying their mortgages before their loans reset.

Tomorrow the Senate Banking Committee is set to consider a comprehensive bill which if passed would have the government insure some $300 billion in loans. What’s interesting is that while FHA says that the program has helped 200,000 mortgage holders to remain in their homes, they also go on to say that really of those 200,000 only 3,000 of them were those in imminent danger of losing their homes. A majority of the borrowers were current on their payments and simply used the program as a means to refinance out of high-cost or unfavorable term loans.

Interestingly enough, despite individuals using the system as a loop hole, new rules will make FHASecure open to all subprime ARM borrowers- rather than just those whose loans have already reset- no more than 60 days late or 30 days late twice in a 12-month period. In addition these potential borrowers need to have home equity, or cash, equaling 3% of the mortgage principal.

With the changes, the agency says it hopes FHASecure will eventually reach a total of 500,000 borrowers. During the past 12 months, foreclosure filings have more than doubled to 650,000 through the end of March that erquates to over 210,000 Americans having lost their homes this year alone.

Here’s a good one- construction of single family homes toppled to a 17-year low as of this week and yet real estate investments are at an all time high.  The initial news isn’t too shocking considering the recent market instability but the fact that investors are putting their money into real estate investment trusts is pretty wild.  Would you have to be crazy to invest money in an area so clearly troubled? Maybe not. Recent Fed rate cuts have led to lower bond yields and relatively low rates on savings accounts but real estate investment trusts are unique in that they are required to pay a large chunk of their earnings back to investors in the form of dividends. 

Sounds good but let’s be honest- who can say for sure if the housing market has in fact hit rock bottom yet?  Assuming things are going to improve soon makes real estate investing an attractive option for investors looking for a large return but if things continue to slide, these returns may be little more than wishful thinking. 

So where then does the risk factor in? It’s common knowledge that demand for new homes collapsed last year and experts predict a similar drop in the rest of the construction market.  A combination economic slowdown, rapid inflation and tighter credit appears to be throwing the proverbial monkey wrench on nonresidential construction projects.  

We realize of course that tough times have a near immediate effect on the residential market (it’s tough to build a new house when you cannot secure a mortgage/ also difficult to make existing mortgage payments when the economy’s crumbling- foreclosures up 65%) we’re finally hitting levels where even gigantic commercial projects are feeling the crunch. Nonresidential construction, which includes office buildings stores, hotels, schools, hospitals, etc. remained strong through much of 2007 but lately the gears have been grinding to a halt.  It makes sense too, after all apartment builders are rightly nervous about collecting their rent in these tough times.  Similarly construction on public projects, such as highways, lots, and sewers, are being put on hold or slowed down as local governments struggle with declining tax revenue and tight budgets.

What it boils down to is the simple fact that gutsy investors are willing to take their chances by sinking money into what is clearly an unstable market.  The market will certainly benefit from the boost but whether or not investors will get what their after is yet to be seen.