Can We Hold Back the Foreclosure Tsunami

People reading this blog may think I only read the New York Times as this is the second time I am referring to information found in the paper. However, I have to admit that there is nothing better to read, despite perhaps their liberal leanings with your morning coffee. On Friday May 29th, there was an article about the continuing rise of residential foreclosures despite the government efforts through the commercial banks to stem the tide. The conventional wisdom was to refinance homeowners out of the burdensome adjustable rate, interest only and other mortgage products that has left most homeowners on the verge of losing their homes into fixed rate mortgages with lower interest rates. Everyone knows the story by now. Homeowners took out mortgages with these teaser rates that were well below the market rate. When these rates re-set after a certain time at a much higher interest rate, the monthly mortgage payment doubled or in some cases even tripled. What homeowners were counting on with the encouragement of mortgage brokers and lenders was that the value of their homes would continue to rise and they could re-finance their mortgage to a lower interest rate at the time of the re-set resulting in the same mortgage payment as before or lower. Lo and behold, the real estate market took a severe downward turn where home values declined in some places by as much as 50%. When it came time to re-finance, homeowners were caught in a bind. In many cases, the value of their homes were worth less than the mortgage. Upon the re-set, the mortgage payments doubled or tripled. The end result was that either people couldn't make the new payment or decided it was crazy to continue to make higher payments on a piece of property that was continually losing value. The mantra was "Why throw good money after bad." From a pure investment perspective, that is always the best thing to do. However, most people felt that it was somehow morally wrong for the homeowner to just give the keys back to the bank and tell them it's your headache now. It seems kind of ironic to me that in every other type of investment, it is considered prudent to cut your losses except when it comes to real estate. People buy stocks on margin which is a form of leverage. Other type of investments use debt to increase return. Real estate is no different. We just call it another name ie. mortgage. Anyways, the government decided something has to be done. It browbeat the banks to modify the loans. Almost all of them have instituted some type of modification program. Another irony is that the banks' investors are now suing the banks for modifying the loans. Do I smell another bailout. All of this leads me to the point of the article. The highest percentage of foreclosures are among the loans that have been previously modified. The culprit is unemployment. They expect the national unemployment rate to rise to 10% by the end of the year. This rate is only the average. There are some states in this country with close to 30% unemployment. I have been preaching this for a long time now. It doesn't matter what the interest rate is or your monthly payment is if you don't have a job or your hours have been severely reduced if you still have a job. YOU CAN'T PAY PERIOD. This was a Great One. New York City was for a short time charging people to live in homeless shelters. IF YOU COULD AFFORD TO PAY RENT, YOU WOULDN'T BE IN A HOMELESS SHELTER. What is the solution. Should government just pay your mortgage until you find a new job. What happens if you don't find a new job or a new one that pays you a salary anywhere close to one you were previously making. The government has thrown money at banks, car companies, insurance companies and various other businesses that come to Washington with their hand out. What about the American People. Where are the incentives to put people back to work. They love to talk about it when making public speeches but if you actually read the bills, it is actually a small percentage of the government spending or guarantees. To me, all of this seems to be a bandaid to the real problems and an early Christmas present to Corporate America.