More foreclosures

"Waves of More Foreclosures" = More Bank Failures + Big Trouble for the FDIC, Suttmeier Says

Posted Aug 11, 2010 07:30am EDT
by Peter Gorenstein in Investing, Recession, Banking

The U.S. housing market continues to send mix signals. More homes continue to enter foreclosure but the number of homeowners carrying so-called “under water mortgages,” declined in the second quarter, Zillow.com reported Monday.

21.5% of homeowners owed more on their mortgage than their home was worth in the second quarter, that’s down from 23.3% in the first quarter and 23% a year ago.

“There are a lot homes caught up in mortgage modifications,” explains Richard Suttmeier of ValuEngine.com, which he says results in a temporary stability in home prices. The key word: temporary.

“There’s waves of more foreclosures coming in the housing market because very few of the HAMP modifications are becoming permanent,” he says.

Meanwhile, the backdoor bailout of the housing market continues. Freddie Mac reported a $4.7 billion second quarter loss Monday and asked the government for another $1.8 billion in aid. Last week, Fannie Mae - Freddie Mac’s larger counterpart - asked the government for $1.5 billion. That brings the total tab for the government-sponsored entities to $148 billion. Suttmeier estimates, Fannie and Freddie, will wind up costing taxpayers at least $400 billion.

All of this housing trouble creates a vicious cycle for the economy, jobs and the fragile banking system, Suttmeier tells Aaron in this clip, predicting another 30% drop in home prices by 2014, as measured by the Case-Shiller Index.

“If you’re not building homes, you’re not creating jobs. Construction is the biggest component of job creation on Main Street USA,” he says. “Community banks can’t lend because they’re stuffed with loans they wrote 2003-2007. They are going bad.”

The 'negative feedback loop’ is going to lead to more bank failures and that leads to another problem – a lack of money in the FDIC Insurance Fund.

"The FDIC Deposit Insurance fund has now been drained by just $1.33 billion so far this quarter bringing the year to date total to $18.93 billion well above the $15.33 billion prepaid assessments for all of 2010,” Suttmeier recently wrote clients. Ironically, filling that gap will fall on the shoulders of the ‘Too Big To Fail Banks’ he says. “Because they can afford it.”

The big banks can afford it thanks to TARP and other taxpayer subsidies but the rising cost of replenishing the FDIC fund means lower profits for the big banks, which means they'll be even less inclined to lend money to the rest of us, further curtailing economic activity.

Did somebody say "negative feedback loop"?

Note from the right jack: The Big Time Dying Media still believes that the Obama economy is OK, if not improving. In the meantime, the total unemployment rate is estimated to be from 16% to 22%, government borrowing is at an all time high, home prices continue to fall, the housing or real estate market is living off of foreclosures, companies are downsizing in the face of unknown government rules and regulations, taxes are set to go up for all Americans, and banks are not loaning to home buyers or businesses. California, Colorado, Michigan, New York and Ohio along with many other states are struggling to stay afloat under massive salaries, union contracts, pensions and entitlements. So, we are fine according to the media.