Bankruptcies in the US rose by almost 30% last month; people in the housing foreclosure process were 97% above January 2007, jingle mail is no longer someone making a poor Christmas joke: it’s the sound of letters being delivered to American banks with home keys inside after people have walked away rather than stay and watch the value of their houses, units, flats, etc drop any further.
The amount of equity Americans have in their homes fell below 50% at the end 2007, according to figures from the US Federal Reserve. It was the first time this is happened since 1945.
Like the subprime collapse and foreclosure ‘boom’, the rising tide of bankruptcies has spread across the US, but remains heaviest in California, Florida and several other states where the housing slide is deepest.
The US Federal Reserve, in its latest anecdotal update on US economic activity (called The Beige Book for the colour of its cover) said economic growth had slowed in eight of 12 US regions since the start of the year, hurt by faltering retail sales and manufacturing and a continued decline in housing.
"Two-thirds of the districts cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth.
"Retail activity in most districts was reported to be weak or softening; manufacturing was said to be sluggish or to have slowed in about half the districts.”
Housing remained a drag on the US economy with the report saying: residential real estate markets generally remained weak, with tight or tightening credit standards” in most districts.
It is no longer some academic debate over what a recession is: it’s now a case that the US is almost there, and is being dragged under by the deepening housing crisis.
Fed Chairman Ben Bernanke showed this week how seriously he sees the problem by proposing, no urging, US banks and financial groups to adopt some radical steps to try and stop the slide.
His comments to a banking conference in Florida have lifted the chances of the US Government, the US Federal Reserve and other regulators finally coming up with an offer that the US banking and finance industry won’t be able to refuse for helping the struggling housing sector.
It will be costly, probably involved all sorts of accounting, tax and regulator sleights of hand to allow it to happen, but it will happen.
There seems to be a growing realization (especially in an election year) that the problems to be caused by the slide in house prices, will be too great for even the US economy and financial system to bear.
There is now a very real concern that as house prices fall, the level of equity buyers have in their homes is destroyed, and that after a while the equity of the lender is cut. The present system of foreclosure and repossession blows enormous holes in the equity levels of US banks and lenders. What Breanne is saying to them is ‘look at ways of limiting the slump in housing prices; otherwise you will pay as well as the borrower’.
US media and economic commentators say the Bush Administration and the Federal Reserve are slowly moving toward some sort of rescue arrangement of distressed homeowners and mortgage lenders.
That will be the important thing to keep in mind: the US banking and mortgage industry will need as much government help (non financial, mostly regulatory) to stop millions of more people being added to around four million who have already been hurt by the loss of their homes in the past year or so.
So far all the stimulation and rescue packages have involved tinkering at the edges with too many rules that restrict the aid to those who don’t need it most.
Fed chairman Ben Bernanke’s comments at that Florida bankers’ conference has started speculation of a deal.
He told his audience "more can and should be done” to help millions of people with mortgages that are often bigger than the value of their homes.
He didn’t go so far as to call for a government driven bailout, but he did push the banking industry into thinking about forgiving portions of many mortgages, and he did so with his toughest warning so far about the potential problems a deepening in the housing crisis might cause.
He signalled his concern that market forces would not be enough to prevent a broader economic calamity.
"Delinquencies and foreclosures likely will continue to rise for a while longer,” Bernanke said in his speech.
He said a surplus of homes for sale indicates "further declines in house prices are likely". That surplus grows every month of existing and newly finished homes, townhouses and apartments.
He told the conference that subprime borrowers are about to see their mortgage rates increase more than 1% under reset provisions in mortgages. This is expected to push more people towards foreclosure as the value of their homes falls below what they owe.
"Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.”
In fact mortgage rates have hardly reacted to the Fed rate cuts as banks tighten their lending criteria more and more, restricting home loans (and business loans) to people and companies were (what) top level credit.
Bernanke said that in the past people would merely refinance a loan when the rate was reset higher (postponing the day of reckoning if you like), but he says that option has now ‘largely” gone because sales of bonds backed by subprime mortgages "have virtually halted" (as they have done here for better quality mortgages from our bankers and non bank lenders).
And, as we have noted in the past, central banks often send people out in twos to make a point and the Fed was no different with Vice Chairman Donald Kohn having his own
