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Thursday, March 05, 2009

Housing Proposals Won't Stop Forclosures

A stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and the rate for homeowners with all mortgage types hit a new record, new data Thursday showed.

Scary first paragraph off of a Yahoo news piece. What is scarier is that the next line says "But that's not the worst of it."

They follow up by informing us that 5.4 million American homeowners with a mortgage, roughly 12 percent of those with a mortgage of any kind were at least one month late or in foreclosure by the end of last year. These are the figures reported by Mortgage Bankers Association.

This was the 4th quarter report which shows these figures up by 10 percent from the 3rd quarter report.

In some estimations there will be eight million more foreclosures within the next few years.

For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we’ve made to support the banks.

For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures. Typically, a homeowner fights off eviction for 18 months, making no mortgage or tax payments and no repairs. Abandoned homes are often stripped and vandalized. Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure.

So, while are politicians are arguing over this bill and that bill, none of them are addressing the "root" of the problem. Instead if stitching up a wound to a major artery, they are simply slapping a band-aid on it and hoping we won't realizing we are still bleeding to death.