Wednesday, October 10, 2007

The Ole D.C. Shuffle.

Business 2.0 reports massive foreclosures expected in New Orleans. The link came for Adrastos. The discussion over there lead to this post.

I've actually written about this before. My views haven't changed. In fact I think the recent mortgage market makes it even more likely. I doubt that many people understand the participation of the Federal Government in the home mortgage market. I know I don't.

Most people know The Feds, through VA and FHA loans have long guaranteed many home mortgages. These agencies will become the owner of any foreclosed houses guaranteed by them.Most people don't know that most "conventional" mortgages are covered by Freddie Mac, Ginnie Mae and Fannie Mae programs. These programs issue bonds most investors believe are backed by the US Government. They represent bundles of mortgages. They were supposed to be building in the risk, but their accounting practices and oversight have been severely criticized for years. I see it is entirely possible that the Federal Government will step in and provide relief to these lenders in return for forebearance on the terms of the mortgages. There have already been reports of these agencies requesting lenders to be lenient with some borrowers and extend better terms or refinance at no cost and some other things. There will still be a lot of foreclosures.

Normally the lender will auction off the REO properties or sell them through some private method to individuals or groups (usually house flippers) who will spruce up the property and sell them on the open market. Usually everyone makes out.

In New Orleans the situation is different. The flippers are hard at work but I hear property is not moving. I doubt the housing market will accept the 20,000 foreclosures projected, especially damaged houses in less desirable areas. Many of the houses will simply be demolished, leaving a vacant lot which might not be easily to sell.

The Real Estate industry feeds on transaction. They make money coming and going. I never met a Real Estate Broker who didn't say "Now is a great time to buy", often because they wanted to generate commissions.

I think eventually the lenders will end up donating their foreclosures to the city redevelopment process. I think the lenders will donate the property and take a write down rather than hold property which can't be sold and that carries with it the cost of demolition and potential liability of mold or other flood related effects. The city will assume the liability and launder the property for the usual suspects.

Call me cynical, but I bet it's at least proposed.

I really don't think the City can administer this property properly either. I simply distrust the current administration and any foreseeable administration.

The downside for the lenders is likely to be quite low. Many, probably most, of the properties would have had flood insurance, which the lenders would have received. That will likely cover most of their loss. Their real problem will be maintaining property while finding someone to take it off their hands. That looks to be a longterm project.

The foreclosed properties will probably be folded into the Redevelopment effort, along with the property from LRA. This would also allow the Federal Government to count part of the cost of bailing out the mortgage market as Gulf Coast relief and feed the power hungry money grubbing kleptocrats who run New Orleans.

No comments: