The Mortgage Bankers Association (MBA) released its latest survey over the weekend, showing 10% of American homeowners at least one month overdue on mortgage payments or in the process of foreclosure.  This marks a 9% increase from just three months prior, a 7.3% increase from a year ago, and the highest level the MBA has recorded in the forty years since its conception.  Needless to say, the housing market and homeowners are in trouble. 

This news follows an announcement less than a week ago that the national unemployment level had risen to 6.7%, the highest it’s been in more than a decade, and one of the highest levels recorded after The Great Depression.  The recent surge in unemployment is no doubt the reason for the spike in overdue mortgage payments and foreclosures.  In addition, the MBA predicts higher delinquency and foreclosure rates in 2009.  Chief Economist of the MBA, Jay Brinkmann, stated:

We have not gone into past recessions with the housing market as weak as it is now.

The significance of Brinkmann’s statement lies in the inevitable downward spiral of the housing market in tandem with the unemployment rate.  The sub-prime mortgage crisis caused unprecedented damage to the housing market, and with millions of Americans inundated with mortgages they can’t afford even on a stable income, unemployment is a near guarantee of home foreclosure. 

The recent surge of unemployment coupled with home foreclosures has caused policymakers like Ben Bernanke, Chairman of the Federal Reserve, to call for aggressive action.  Bernanke supported a plan that would have the U.S. government purchasing delinquent mortgages and refinancing them, and another plan that would provide a loan-guarantee to homeowners.  Both of these plans were rejected by the Treasury Department, citing that the proposals could cause people to stop paying their loans, encourage banks to foreclose, and postpone aid to homeowners. 

The Treasury Department has been working to formulate its own proposals to combat the housing crisis (in addition to working towards revising the proposals supported by Bernanke).  The Treasury is composing a proposal that would encourage banks to lower interest rates on certain kinds of loans, and another proposal that would reduce federal interest rates to 4.5% for newly issued home loans. 

Homebuilders and realtors applauded news that the Treasury Department would consider lowering interest rates again, an idea reflected in the stock market last week when builder stocks rallied to substantial gains.  Despite perceived long-term benefits for potential buyers, the promise of lower interest rates could stall the housing market in the short term, encouraging serious buyers to wait for a better deal.  In addition, one has to wonder if interest rates dip low enough for people of all income levels to afford a home; isn’t this just inflating the next credit bubble? 

Despite implications of a repeat of the sub-prime mortgage crisis, should the interest rate on the 30-year fixed loan be lowered to 4.5%, a financially secure first time buyer would be foolish not to take advantage of the situation.  The only real danger to the buyer is purchasing more home than they can afford.  With companies all over the U.S. continuing to downsize, a sudden bout of unemployment combined with an expensive mortgage could spell disaster for a new home owner, and spiral the national housing market back into its current funk.  But on the whole, a 4.5% fixed interest rate combined with smart planning could kick start the housing market with a flood of new buyers, and lead to future solidarity. 

Though the Treasury Department has taken steps to benefit new buyers, it has yet to cater to homeowners who are locked into their current rate.  Should the housing market be overwhelmed with new buyers, the homes of current homeowners could become undervalued.  In addition, the amount of current homeowners who could benefit from refinancing at a lower interest rate trumps the amount of potential new homeowners five fold. 

In late November the average rate for the 30-year fixed-rate mortgage fell to 5.47% from 5.99%, and applications for refinancing soared 203%, while loan applications increased just 38%.  From these figures, it should be obvious to the government who has the most to gain from a lower interest rate.  However, as of yet, there are promises of aid, but few plans to provide aid to current homeowners.  With millions of people in foreclosure or in danger of foreclosure, there seems to be little hope of a reversal in the housing market until the core issue is addressed

Thus far the Obama administration has resisted overtures from the Treasury Department to discuss the current predicament, declining to comment on what kind of plan the new administration would support.  However, it is clear that these problems will be inherited by President-elect Obama, and require attention his first week in office.  In the mean time, Secretary of the Treasury Henry Paulson and the Bush administration continue to make plans and promise financial support to the housing sector, the question is, will it come soon enough?

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