Credit rating agencies have put ratings of various insurers on watch for downgrades because of continued weakness in the U.S. mortgage markets, especially foreclosures on mortgages backed by subprime and limited-documentation borrowers. Bond as well as mortgage insurers are under tremendous pressure to raise billions of dollars in capital to forestall possible downgrades in their credit ratings as worries about the value of the securities they've insured persist. Failure to make higher payments on ARMs by property owners has lead to a surge in bank seizures of US homes. With property owners failing to make higher payments on adjustable rate mortgages, U.S. home foreclosures have jumped 90% YoY to 45,327 in January. Total foreclosure filings, which include default and auction notices as well as bank seizures, have increased 57% YoY in January, its highest level since August last year. According to Realty Trac, more than 1% of U.S. households were in some stage of foreclosure during 2007. The situation is expected to worsen in the months to come with an estimated USD 460 bn of adjustable mortgages scheduled to reset in 2008. Delinquency rates have already touched their highest levels since 1985 having increased by 87 bps since December 2006 to 5.82% in the last quarter. As long as house prices continue to plummet rising foreclosures would compel banks to resell the foreclosed properties (estimated to be 1 mn in 2008), adding further to the glut of inventory and forcing prices down even further. The vicious circle is expected to persist unless house prices recover. However, a housing bottom looks nowhere in sight with Mr. Bernanke expecting housing to weigh on the economy "in current quarters". The sharp fall in house prices has also created negative equity for home owners as they find it difficult to secure funds on housing stock whose net worth is depleting sharply. Share of homeowners' equity, the market value of a home minus the size of its mortgage, has plunged to 47.9% in the fourth quarter of 2007 from a high of more than 80% in 1945, a reflection of surging delinquencies and housing foreclosures. Value of housing related assets (including mortgaged assets) have fallen by USD 170 bn to USD 20.2 tn last quarter.
Over the recent past, policy markers in coordination with various financial institutions have announced multiple measures aimed at comforting homeowners squeezed by the housing mess. The U.S. Department of the Treasury and the Department of Housing and Urban Development in collaboration with the country's largest mortgage servicers convened the "Hope Now Alliance" whose objective is to try and halt the flood of foreclosures either by freezing mortgage rates, extending payment periods, counseling and postponing or eliminating scheduled rate reset increases. Further more, six major mortgage lenders, namely, Washington Mutual, Bank of America, Wells Fargo, JPMorgan, Citigroup and Countrywide Financial in coordination with the Bush administration have worked out a plan titled "Project Lifeline", wherein the lenders promise to seek contact with homeowners who are 90 or more days overdue on their mortgages. In some cases, homeowners will be given the chance to "pause" their foreclosure for 30 days while lenders try to work out a way to make the loans affordable. The New York State Insurance Department met with banks to persuade them to inject capital into the monolines - reportedly in the region of USD 5 bn in immediate capital and ultimately to commit up to USD 15 bn as concern mounted that further guarantor downgrades could force a fresh round of write-downs. In a move to boost the housing market in expensive areas, the government has raised the cap on the size of mortgages that can be bought by government-sponsored mortgage giants Fannie Mae and Freddie Mac or insured by the Federal Housing Administration (FHA). Furthermore, Fed Chairman Ben Bernanke has urged lenders to reduce the principal amount of troubled mortgages and proposed that the FHA's authority be expanded so that it can then insure the written-down loans.
Although the steps taken by the Bush administration towards rescuing homeowners on the brink of foreclosure are definitely in the right direction, the measures undertaken might prove to be just a short term palliative rather than providing a permanent solution. While lenders need to move more aggressively to reduce loan balances to current home values and make monthly payments affordable, these lenders face the risk of lawsuits from troubled investors that own the loans if they believe that borrowers have been given overly generous terms. One also wonders how many of the bigger loans Fannie Mae and Freddie Mac will be able to finance when they themselves are heavily cash strapped having recorded massive fourth quarter losses of USD 3.56 bn and USD 2.45 bn each. While Bernanke's rescue proposals have recieved a positive response from policy makers and are expected to effectively address the housing crisis if implemented succesfully. It is, though, a huge, 'if'.
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