Spin it any way you want to, the risk to U.S. banks, the economy and homes in the U.S. is far from over, as recent data show, properties in the U.S. are still at risk to the tune of over $3 trillion ($3.4 trillion). And re-sets for most of them are coming due over the next couple of years.
As of June 30, close to 33 percent of all properties that are mortgaged are underwater, or in a negative equity position, according to data released from First American CoreLogic.
“Negative equity continues to be the dominant driver of the mortgage market because it leads to foreclosures in the event a borrower experiences some kind of economic shock such as a job loss, illness or other adverse situation. Given that negative equity did not increase this quarter and home prices declines are moderating or flattening, we may be at the peak of the negative equity cycle. However, until negative equity recedes and unemployment declines, mortgage
risk will continue to be very elevated,” said Mark Fleming, chief economist for First American CoreLogic.
That’s why re-sets are such a powerful negative force over the next couple of years, because by law banks and lending institutions must do re-sets, and with negative equity or being underwater, it means people will have to default on their loans and walk away from their homes.
Now as far as how this affects the FDIC, at the height of the S&L crises from 1989 to 1992, bad assets at that time were at an average of 24 percent, and that brought down the FSLIC. But if the average of 34 percent is correct now, it means an extraordinary pressure upon the FDIC, which of course we know is already there.
Concerning specific numbers, 15.2 percent of U.S. mortgages represent the 32.2 percent mentioned earlier of mortgages underwater. The only positive news attempted to be spun out of that is the rate of underwater mortgages seems to be slowing; albeit at a very slow pace, if they are at all, with home price drops seeming to be leveling off.
Even so, another 2.5 million mortgaged properties are moving toward being in negative territory, which would raise the percentages much higher. Adding them together with those already underwater would bring the total to an astounding 38 percent of all residential mortgages at risk of default.
Near negative equity is the term used to describe the above, where home prices are within 5 percent of being less in value than the mortgage against them.
We won’t get even get into commercial real estate, which has also been hammering the banks and lending institutions. So when the mainstream media attempt to paint some type of positive picture of the scenario banks and Americans are facing, I want to hear something besides the rate of home prices dropping is slowing down. That does very little, if anything, to assuage the situation.
The leading states in negative equity are California, where the total value of homes that are in negative equity was $969 billion, next is Florida ($432 billion), New Jersey ($146 billion), Illinois ($146 billion) and Arizona ($140 billion).
For cities, those in the worst positions are led by Los Angeles, which had over $310 billion in total property value in a negative equity position, behind them is New York ($183 billion), Miami ($152 billion), Washington, DC ($149 billion) and Chicago ($134 billion).
Another problem this could cause is if there really is a recovery any time soon, it’ll be very mild, and when re-sets kick in and large numbers of people lose their homes and more pressure is on banks, lending institutions and the FDIC, it’ll very difficult to sustain any significant and lasting economic growth until we pass through this period and the system is cleansed of the bad mortgages. That will take, as mentioned above, a couple of years.
In other words, things may get a little better, but there will probably be a couple of secondary or echo recessions (really a continuation of the one we’re in) after some general recovery. We’re still in for a long ride.
The truth is we have no idea how deeply this will affect the banking industry, but they are far from recovering, and many more will fail before we’re through.
