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The mounting dismal data are too overwhelming to deny any longer—the glass is half empty. The economy is…

A Sinking Feeling

The mounting dismal data are too overwhelming to deny any longer—the glass is half empty. The economy is getting worse, not better; ditto for the housing mar­kets. The government is throwing money at our prob­lems, but nothing is sticking. Investors are not just wor­ried, but scared. The stock market, as measured by the Dow Jones Industrial Average, has fallen below 7,000 for the first time in a decade and investors are bracing for more bad news.

There is almost a helpless feeling among households; they are frozen as they watch their 401(k)s plunge in value and their neighbors lose their jobs. The Obama administra­tion, the Treasury, Congress and the Federal Reserve have tried just about everything—pumping trillions of dollars into the financial system, crafting a multi-billion dol­lar stimulus package, and bailing out large insurance, bank and automobile com­panies. In the end, the government is selling hope that investors are not buying.

The unemployment rate is now 8.1 percent and climb­ing. With such a strong momentum of job losses, it seems almost inevitable that the unemployment rate will climb to 10 percent before it is all over.

The government is asking for patience, telling us that the $787 stimulus package has yet make its way through the economy and it is right. The glass is half empty but that does not mean that we can’t refill the glass. It is dif­ficult to reverse direction when the economy is spiral­ing downward with a great momentum. Eventually, the recession will lose its momentum and the economy will hit bottom and reverse course. Hopefully, the massive Federal spending programs already underway will have a positive impact when that situation presents itself.

The newest government ef­fort—the $75 billion fore­closure mitigation plan of­fers more hope. Details of the plan were unveiled this past week. It is projected that about four million borrow­ers will beeligible to modify their mortgage loans. To qualify for modification as­sistance borrowers have to fully document their income, live in the property, have a primary mortgage less than $729,500 and sign a state­ment of financial hardship. Lenders would reduce the mortgage rate and/or the term of the mortgage in order to bring the mortgage debt service/income to 31 per­cent. The government would share the cost for lenders to get to that ratio. The other part of the foreclosure mitigation plan is to provide an opportunity for about five million borrowers whose loan balance is greater than the value of their home to refinance into a lower cost loan.

Here is my take on the foreclosure mitigation plan. The plan offers promise to those borrowers who qualify but will not help those families who have lost their jobs. The government would end up subsidizing homeowners who are financially capable of surviving the economic slump on their own. The plan also rewards bad behav­ior and exposes taxpayers to higher risk by imposing too many policy demands of Freddie Mac and Fannie Mae. With all that said, the plan is welcome news for the housing market because it would reduce the pace of foreclosures that ultimately would reduce the supply of homes; eventually stabilizing home values.

Economic reports this past week confirm that first quar­ter GDP probably contracted in the 5 percent range. The nation’s labor market continued to deterio­rate sharply with pay­roll employment con­tracting by 651,000 in February, bringing the total number of job losses for the last three months to almost two million. The unem­ployment rate climbed to 8.1 percent. The dismal labor market threatens to worsen the recession by negative­ly impacting consumer spending and confi­dence. Vehicle sales for February dropped to an annualized rate of 9.1 million units, more than 40 percent below the year ago pace. Automobile buy­ing incentives are having little impact on sales volume. Factory orders for January were down 1.9 percent, while shipments were down 1.7 percent. Both orders and shipments have now declined for six consecutive months, reflecting a sharply contracting manufacturing sector. Finally, the Federal Reserve’s Beige Book re­ported that 10 of 12 Federal Reserve districts reported that economic conditions in January and February dete­riorated since the last Beige Book.

On the housing side, the Mortgage Bankers Association released its mortgage delinquency survey for the fourth quarter of last year. The delinquency rate on all loans rose 89 basis points to 7.88 percent, an all-time record. The delinquency rate for prime loans increased 72 basis points to 5.06 percent, while the delinquency rate on subprime loans increased 185 basis points to 21.88 per­cent. Delinquency rates on prime adjustable rate mort­gages increased 149 basis points to 9.69 percent, while subprime adjustable loans rose by 289 basis points to 24.22 percent. There was a slight increase in foreclo­sures starting with 1.08 percent of mortgages entering foreclosure, up only 1 basis point from the prior quarter.
It is not overstatement to say that the nation’s delinquency situation is dismal and getting worse. Mounting job losses and falling home prices are contributing to borrow­ers falling behind on payments. Foreclosure moratoria by Fannie Mae and Freddie Mac and most states have kept the number of foreclosures started from sharply in­creasing.

The National Associa­tion of Realtors’ pending home sales index for January fell 7.7 percent from a month ago and 6.4 percent from a year ago. The report portends unfavorably for future home sales numbers in the February/March period. And finally, both the pur­chase mortgage application index and refinance appli­cation index dropped considerably for the week end­ing February 27. The purchase index fell 5.6 percent to 236.4, while the refi index fell 15.3 percent to 3,063.4. The sharp decline in mortgage applications is bad news considering that mortgage rates were basically flat for the week. The weak economy, job losses and deteriorat­ing consumer confidence are keeping many households from applying for mortgage loans.

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