Foreclosures, Negative Equity to Grow

Paulson said the recent market troubles have caused the Federal Reserve to step in and make some adjustments in how it affords liquidity to the financial system. The Fed is now allowing primary dealers temporary access to liquidity facilities.

“Their creativity in the face of new challenges deserves praise, but the circumstances that led the Fed to modify its lending facilities raises significant policy considerations that need to be addressed,” Paulson said to the U.S. Chamber of Commerce today, according to a transcript of his prepared speech.

He said the country is working through a correction for the housing market, and it is likely to take time. In the interim, he said we should be expecting declines to take place, and he noted some that have occurred.

Paulson cited the Case-Shiller index of home prices in 10 major metropolitan areas, which revealed a drop of 11.4 percent in home prices over the 12 month period ending in January. He noted the futures market anticipates that the index will go down another 13 percent this year.

The secretary said government sponsored enterprises Fannie Mae and Fannie Mac have both had an integral role in aiding in mortgage finance during the housing crisis.

“It is very important that the GSEs remain positioned to play this critical role,” Paulson said. “A stronger capital base will better enable them to support more home purchases and refinancings through their securitization activities. Additional capital not only increases the availability of mortgage financing, but also strengthens mortgage market fundamentals.”

The subprime mortgage market financing “is largely closed,” but Paulson said the Bush administration will continue to search for means by which to expand mortgage opportunities for all borrowers, including subprime borrowers, with financial capability. He explained that out of about 7 million outstanding subprime loans, around 10 percent were investors or speculators — though the figure could be higher due to mortgage fraud.

Another problem that Paulson addressed was the growing number of foreclosures. There were about 1.5 million foreclosures started last year, he said, and that number could possibly rise to as much as two million in 2008. But he noted 92 percent of borrowers are current and only 1 percent are in foreclosure.

Among subprime adjustable-rate mortgages underwritten in 2006, 18 percent were in foreclosure before the initial rate reset.

Paulson said the number of households with a negative equity can be expected to climb from the current estimate of 8.8 million, as it is a more common occurrence in a housing crisis. This was exacerbated by the fact that 29 percent of loans were originated with no down payment in 2007.

But he doesn’t think a large effort needs to be made to combat negative home equities because they don’t affect loan repayment capabilities.

“Homeowners who can afford their mortgage payment should honor their obligations,” he said. “Let me also emphasize that any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator. Washington cannot create any new mortgage program to induce these speculators to continue to own these homes, unless someone else foots the bill.”

Paulson noted the housing dilemma as a primary source for the market crisis in the nation, which each affects the overall economy. But he said efforts will be pursued to ensure improvements are made.

“We will continue to pursue policies that strike the right balance: that do not slow the housing correction, yet also help avoid preventable foreclosures and unnecessary capital market turmoil,” he said.

Natalie Merrill is a staff writer for MortgageDaily.com with a Journalism degree from Southern Methodist University.

e-mail: merrill.natalie@yahoo.com