Many of the commenters the constant bailouts of Wall Street and the banking system all seem to believe that inflating the currency, manipulating interest rates, and providing welfare to corporations will somehow stop the foreclosure crisis and allow the housing and stock markets to recovery. Unfortunately, this is not the case, and there will be a few other waves of foreclosures before housing stabilizes.
The current recession is causing a lot of jobs to be lost or downgraded in many sectors of the economy, from the automotive industry to the financial industry. Just this past September, the economy shed 159,000 jobs. This will make it more difficult for people to keep on top of their mortgage payments, as the savings rate in the country has been close to or below zero for several years.
And because the subprime foreclosure meltdown has dragged property values down in some of the most inflated real estate markets and throughout the country in general, people who lose jobs will be unable to sell to stop foreclosure in time. They will then go through the process of losing the home in the court system, driving home prices down even further. The more properties are owned by banks, the more communities turn into crime-attracting slums, continuing to erode property values.
Next, Option Adjustable Rate Mortgages are set to begin adjusting in spring of 2009. Even if interest rates are low at the time (probably because of the Federal Reserve’s response to the latest crisis), people will have to pay more, because these loans allowed borrowers to pay less than the monthly interest charge. And if they have been paying the negative amortization amount of the loan every month, they will be underwater.
Many of the loans were set up with two years of low payments and then an adjustable amount determined by the remaining loan balance at the end of the introductory period. These mortgages are designed so that, once the reset occurs, the loan is amortized at its current balance for the remaining 28 years. Negative amortization means the loan balance increased for the first two years unless borrowers paid extra.
Thus, large numbers of homeowners who have Option ARMs will not be able to make a larger mortgage payment, and will enter foreclosure. They will realize they owe much more on the home than it is worth and have little incentive even to attempt to save the home. And because of the high foreclosure rates due to the previous waves of home losses, property values will stay low, making it difficult to sell or find a foreclosure lender who can refinance based on equity.
All of this will mean lower property tax revenue for local governments, initiating a fourth wave of foreclosures in communities. Two actions may be taken by local governments in response to a huge decrease in revenue. Either government services will be cut back or local levels will declare bankruptcy, or property taxes and fees will be raised on homeowners, businesses, and consumers.
If counties go out of business, they will have to lay off bureaucrats or reduce pay. This will cause more former public employees to have less money to pay their mortgages and support local businesses. With higher fees and taxes, homeowners and people living in the community will have less money to pay their bills, which will lead to more foreclosures. No matter what action governments take, the end result will be more short term economic hardship.
High foreclosure rates, low property values, and high property taxes are all a losing combination for a county, which is why local governments are in such a difficult position. Either they try to maintain the same level of services in an empty community, or they reduce services and fail to follow through on all of the promises the made to be elected in the first place. And after all, who would ever want to live in a town with vacant buildings that attract crime and still have to pay expensive taxes to keep the bureaucrats in power?