Aaron Gallagher

As the unemployment rate threatens get into double digits from the current rate of about 9%, analysts expect foreclosures to go up significantly in future. The new wave of foreclosures will include not only sub-prime borrowers, but also borrowers who were once financially healthy but are falling into bad times as a result of job loss. Mark Zandi, chief economist at Economy.com, a provider of economic analysis, has said that "loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They're coast to coast."

According to Economy.com, unemployment will account for 60% of mortgage defaults this year. The Obama administration announced a $75 billion incentive program for mortgage companies that reduce payments for troubled homeowners, in February. The program was estimated to help at least 4 million homeowners facing foreclosure. With the employment situation not showing any signs of improvement, experts are now wondering how effective the plan will be. Alan Ruskin, chief international strategist at RBS Greenwich Capital says he doesn't "think there's any chance of government measures making more than a small dent."

According to a survey conducted by Bloomberg News, resales of home rose by 2% in April from March. Falling prices, tax credits, and low mortgage rates may be contributing to an increase in home resales. The rise in foreclosures also helped home resales. Foreclosed properties accounted for 50% of home resales in March. "Home sales are being boosted by foreclosure sales and that's helping to keep activity stable," says Celia Chen, an economist at Economy.com, a provider of economic analysis. Many analysts believe that the market is stabilizing. "Home sales and construction activity are probably at the bottom," said Chen. Robert Niblock, Chief Executive Officer of Lowe's Companies, a large retailer of home-improvement products, said in a conference call that "there have been some encouraging signs in recent weeks that suggest perhaps the worst is behind us. Consumer confidence has ticked up. Housing turnover, especially in certain markets, is showing signs of a bottom."

With property values declining, can homeowners expect to pay lower property taxes? Yes, in some cases. Property values are reappraised by assessors in cities and counties annually or biannually. The reassessment happens on the basis of recent sales of comparable properties in the neighborhood. Property taxes could drop in areas where there has been a significant drop in property prices. Rick Auerbach, Los Angeles County Assessor, says, "Assessors have been flooded with requests from homeowners to reassess their home values." Reduction in appraised values may not automatically lead to a property tax cut since governments may raise tax rates in order to make up for the drop in tax collections. However, raising rates is not an easy option for governments. Ken Wilkinson, the property appraiser for Lee County in Florida, says, "In most places there's a statutory limit to rate increases. In Florida, they can't be raised more than 10%."

According to the National Association of Realtors (NAR), home sales rose 2.9% in April from March. While sales in the low-end properties segment have risen, the market for high-end properties is still sluggish. Sherry Chris, chief executive of Better Homes and Gardens Real Estate, says, "We're looking at a dual market right now." Mortgage for expensive properties is getting difficult to obtain on account of lenders tightening their lending standards. The government controlled mortgage companies such as Fannie Mae and Freddie Mac cannot purchase loans above $730,000, which are commonly referred to as "jumbo" loans. Jumbo loans which accounted for 17% of the mortgage market two years ago, now account for just 5%. In most places, there is no significant interest for properties over $1 million. Ben Coleman, owner of Century 21 Hartford Properties, says, "That's where we're really feeling the pinch." Lawrence Yun, chief economist at NAR, has urged the Federal Reserve to buy up jumbo loans in order to restore liquidity in the high-end mortgage market.

Regulators have told Bank of America it needs $34 billion of capital, Citigroup needs $5 billion, Wells Fargo needed $15 billion, Morgan Stanley needs $1.5 billion and GMAC needs $11.5 billion, according to recent leaks. The reported capital shortfalls are much larger than analysts had expected, but investors aren't panicking, because the banks seem able to handle the shortfalls, and in any event any news is better than uncertainty. Treasury Secretary Timothy Geithner said that no U.S. banks face the risk of insolvency, even though more than half of the 19 tested are presumed to be in need of capital, if we can believe the flood of leaks in the media lately. "None of those 19 banks are at risk for insolvency," he said, according to a transcript of a television interview. Geithner also said the pace of the U.S. economic decline was slowing, even as the economy still faced enormous uncertainty, but we all knew he'd say that, didn't we? He and Bernanke say it about twice a
day these days. It kind of covers all bases and leaves a backdoor open; if the economy improves, they can claim credit, and if it goes south, they can claim it's due to the "uncertainty."