Economic Update – Foreclosures Spike Among Prime-Mortgage Holders

The tsunami of residential foreclosures may have started, back in the days of easy mortgage money, with borrowers whose only qualification was being able to fog a mirror. About half of those kinds of subprime mortgages have resulted in a foreclosure outcome, and Alt-A-inspired foreclosures are spiking too. But now, according to the Mortgage Bankers Association, foreclosures on prime fixed-rate loans represent the largest share of brand-new foreclosures. Currently about 6 percent of all prime mortgages are at some point in the foreclosure process, twice as many as a year ago. Four states account for nearly half of the prime foreclosures: Arizona, California, Florida and Nevada. But there are still plenty of other homes being lost in other parts of the country, and in the case of prime-mortgage foreclosures, the cause isn’t hard to pinpoint–unemployment. There was actually a spot of good news about unemployment on Thursday, namely that new unemployment claims dropped to 623,000 in the week ending May 23, down 13,000 from the previous week, according to the U.S. Department of Labor. It was another example of “less bad than expected” good news. Still, the number of people receiving unemployment benefits, more than 6.7 million, is as high as it has ever been. An economist at the Federal Reserve tried to re-assure Congress on Thursday that the banking industry, now that it has been stress tested, is ready for the next pack of wolves at the door. Those wolves would be commercial real estate defaults. At a Congressional Oversight Panel hearing, Til Schuermann, vice president-risk management for the Federal Reserve Bank of New York, said that he’s “comfortable that the size and portion of commercial real estate exposure was taken into account in the stress test.” The catch, of course, is that the stress test was designed to measured the health of the nation’s 19 largest banks. Admittedly, the health of those particular institutions is important, but they are hardly the only ones facing losses on commercial real estate loans. Plenty of regional, mid-sized and even smaller lenders are too. Will the Fed’s Term Asset-Backed Securities Loan Facility (TALF) help ameliorate the prospect of un-refinancable commercial real estate loans for the spectrum of lenders? It’s the $64 question (or rather, the multi-billion-dollar question) in real estate today, and the answer is “maybe.” “Financial services firms who partake stand to benefit from relatively inexpensive financing, as well as contribute to the economy’s recovery,” said Mike Bernstein, a partner in Grant Thornton’s Financial Services practice, but he also noted that there are still concerns that the government could change the terms of the program retroactively. Also, “compliance will be an ongoing responsibility and challenge as the TALF program continues to evolve–financial services firms must decide if the opportunity is worth it.” Wall Street is back in zigzag mode. Up Tuesday, down Wednesday, then back up again Thursday, never mind what might happen to GM or mortgage interest rates in the near term. The Dow Jones Industrial Average gained 103.78 points, or 1.25 percent, while the S&P 500 was up 1.54 percent and the Nasdaq saw a gain of 1.2 percent.