First American CoreLogic is a company that tracks all kinds of mortgage and property data. The firm’s latest report on “underwater” or “upside down” borrowers — those who owe more on their mortgages than their homes are worth — suggests the problem is getting worse.
More than 8.3 million mortgages exceeded the value of the homes securing them in Q4 2008, up from 7.6 million in Q3 2008. That’s a whopping 19.8% of all homes that have mortgages against them. Add in those loans that are near the negative equity threshold, and you get a reading of 25% of all U.S. loans. Some more insight from First American on the meaning of these numbers can be found at this Wall Street Journal link.
Meanwhile, I like this Bloomberg story that details how and why lenders and loan investors are STILL hugely reluctant to cut mortgage principal balances … and how that could doom the Obama rescue plan to the “dud parade” of federal bailout programs. Good reading.
Finally, it looks like the moronic commercial real estate investments made at the peak of that market are coming back to bite investors in a big way. If you had any doubt that big money managers could make the same stupid mistakes in commercial as casual house flippers did in residential, this story should put that out of your mind:
“In a sign that pension funds and other institutional investors are about to get clobbered by losses in commercial real estate, Morgan Stanley told investors to expect as much as a 60% fourth-quarter write-down on the equity in a marquee $8.8 billion real-estate fund, according to a letter reviewed by The Wall Street Journal.
“Morgan Stanley hailed the commercial-property MSREF VI International fund as “the largest-ever real-estate fund” when it announced its debut in June 2007. The Wall Street firm projected a 22.4% overall average annual return for the vehicle, which made big, highly leveraged investments on commercial properties scattered mostly in Japan, Germany, China and Australia.
“The fourth-quarter losses come on top of a $1 billion shortfall during the first nine months of 2008, which means the fund has lost about two-thirds of its $6.5 billion in invested capital in 18 months. Among the fund’s bad bets: a $3 billion acquisition of more than two dozen office buildings in Germany in July 2007 at a very low yield of 3.5%. The fund invested $350 million of equity in the project. As of September, Morgan Stanley valued the equity stake at just $23 million, according to the fund’s third-quarter report.”
Oops.
{ 3 comments… read them below or add one }
Mike,
I read your Money and Markets piece this morning(March 6), and, while you may be correct as to how to get out of the current mess, I recoil at what you’re saying. To cut the principal which some set of borrowers owe on their mortgages goes against all which I hold as holy in the world of business and life. Your suggestion is one of the things that is causing this problem, especially in the US. Personal responsibility must be demanded from people and all citizens must be treated equally. If someone or a company made bad decisions, they must pay the consequences. If this had been the norm, the country would not be in this situation now. I would welcome a response from you.
Mike Larson Reply:
March 6th, 2009 at 2:45 PM
If you’ve been reading my writings over the past couple of years, you know I generally do NOT agree with bailing people out. I have said in just about every interview I’ve done that falling home prices, the desctruction of debt via foreclosure, etc. are not part of the problem. They are part of the solution. I am merely pointing out that IF you are intent on doing something, do it right. And the Obama plan does not go far enough (principal reductions) IF you insist on modifying loans more aggressively. Hope that helps.
I have a question for all
How many of us unemployed worker can qualify for a refinace with out a job?
Or has any one even gone to the banks and ask if you can get a loan without a job?
i know that:
without a job even on unemployment you have no chance for a loan.
with reduce income your income to debt ratio makes you not qualify.
well i’m sure that no bank wants this information to go world wide.
so if washington wants to help out everone give it to the people and
not to the banks who are laughing because were to stupid to know the difference.
my job lasted 19.5years and there is alot of things we as unemployeed people lost
our retirments, our homes, our credit, our medical, and but we did get 25 dollars more a week to help us out with what?
Sadly, people do not understand the point. It is really not about bailing out the individuals by doing principal reductions it is really about protecting the masses. Each time a lender forecloses you add one home to the inventory and eliminate one person from the pool of folks who can be buyers. This is destroying the market further and and perpetuating the problem. If the masses are ok with their equity being destroyed further, continue with the current path… consumers will continue to walk away and and home values will continue to decline… plain and simple. Principal reduction modifications will cut inventory, slow foreclosures and PROTECT the masses who are complaining. As for personal responsibility, the priority of all persons is to support their families, if they are underwater and cannot afford their payments, their personal responsibility is to take care of their families. Shame on anyone that thinks differently.
Of course this is contrary to what everyone thinks but if you really want to protect the masses, YOU MUST STOP THE FORECLOSURES and get the inventory to normalize on both the house supply and the pool of buyers.