Decisions, decisions. How to spend the next $350bn? Democratic policymakers want to improve the oversight of the troubled asset relief programme and better track how recipients use government funds. They also want at least $40bn of the next tranche to be used to help struggling homeowners stave off foreclosure. With the first slug of money lodged in bank balance sheets, it is time, they argue, to spread aid around.
However well intentioned, helping homeowners is a daunting challenge. Foreclosure figures and the housing market are set to worsen. Resets loom on alt-A and option adjustable-rate mortgages, which could cause borrowers to default at similar rates to the subprime segment. State-level moves to slow foreclosures will have pushed filings from last year into this. Rising unemployment, too, is set to increase delinquency rates.
Worse still, given already sky-high supply, there is evidence that foreclosed properties are not yet fully reflected in inventory figures. RealtyTrac matched its database of bank-owned properties to agents’ listings for four states: California, Florida, Wisconsin and Maryland. Only between a quarter and 35 per cent of bank-owned properties (known as real estate-owned, or REO) showed up in the listings, suggesting that banks hold a sizeable “shadow inventory” of foreclosed homes. Adding back that missing portion of RealtyTrac’s 900,000-odd total of REO homes would increase official inventory figures based on listings by about 15 per cent. Such an overhang of minimally maintained properties would further depress prices.
Citigroup’s endorsement last week of bankruptcy reform, enabling judges to restructure mortgage debts – previously the industry’s bête noire – shows new willingness for drastic solutions. But such measures could come at the cost of added uncertainty and higher interest rates. Loan modification, meanwhile, remains tricky as shown by the limited uptake of existing programmes and high rates of re-default. There is no easy answer to mortgage misery.