News: Defaults Up and Equity Down (Expect Drastic Political Action)

There is more bad news today for the real estate industry.

The New York Times reports today that “defaults on home mortgages touched another all-time high at the end of the last year as foreclosures surged on adjustable-rate mortgages.” According to the Times, the Mortgage Bankers Association announced Thursday that “the number of loans past due or in foreclosure jumped to 7.9 percent, from 7.3 percent at the end of September and 6.1 percent in December 2006. Before the third quarter, the rate had never risen past 7 percent since the survey began in 1979.”

The article also notes that “much of the increase in delinquencies and foreclosures came from a handful of states, particularly California and Florida. Those two states account for about 21 percent of all mortgages but had 30 percent of the new foreclosures started in the quarter. Nevada, Arizona, Michigan and Ohio also had high default rates. Defaults were highest on adjustable-rate mortgages, those that start with lower fixed interest rates at first but reset to higher, variable rates after a few years. While many of the loans made to people with blemished, or subprime, credit were past due or in foreclosure, the number of prime adjustable-rate loans also rose rapidly to 8.1 percent from 4.3 percent in December 2006. ” Douglas Duncan, the chief economist for the Mortgage Bankers, said the rates would probably rise further for much of this year as house prices fall further and banks and investors remain unwilling to lend and buy mortgage securities.

Other news that indicates that the real estate crisis is still escalating comes from the Federal Reserve, which reported today that Americans’ percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945.

According to, “Homeowners’ percentage of equity slipped to a revised lower 49.6% in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9% in the fourth quarter – the third straight quarter it was under 50%. That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945. The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.”

What this adds up to is the conclusion that the real estate and mortgage crisis isn’t going to resolve anytime soon, and will get far worse in the near future.

So far, the hardest hit areas have been the residential sectors in locations that had seen the greatest price increases during the boom, such as California and Florida. But we believe that the impact of the crisis will be much more serious and far-reaching, expanding into core commercial and industrial properties across the entire country.

The political pressure on the States and the federal government to take sweeping and even desparate actions will also continue to mount, especially because this is a presidential election year.

For this reason, we expect that the legal landscape for mortgages, foreclosures and the credit market might be drastically different a year from now.

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