We seem to be getting mixed signals from the media about the economy and the housing and mortgage markets. I do not doubt those who say this is the worst economy since the Great Depression.  In response the Government bailed out banks, insurance companies, Fannie Mae and Freddie Mac, and even GM and Chrysler.  But has the billions of dollars in taxpayer money really helped?  Let's take a look...

Just recently, the government proudly reported that "the GDP rose at a 3.5% annual rate in the third quarter, unofficially marking the end of the worst recession since World War II."  Frankly, I don't see it.

Foreclosure rates keep climbing.

Nationwide, 937,840 properties were affected by foreclosure in the third quarter, or one for every 136 households. That’s up 5.4 percent from the second quarter and 22.5 percent from a year ago.

The unemployment rate in the U.S. has hit 10.2%, the highest in 26 years!

Dean Baker, a director for the Center for Economic and Policy Research, said he did not expect declining unemployment rates until next spring. “We may be looking at very high levels,” Mr. Baker said, “barring a policy response, for several years into the future.”

Mortgage rates dropped below 5%.  This is clearly an artificial rate set to spur more borrowing, but is it working?  The figures for mortgage applications are mixed.  Last week mortgage applications rose 8.2%.  But, just two weeks prior they had dropped 12.3%. 

The federal government's response is to continue to throw money (our money) at the problem.  Congress approved a $24 billion bill that will extend unemployment benefits and the tax credit for homebuyers.

Under the housing program, people seeking to own a home for the first time in three years would receive an $8,000 tax credit if they sign a contract by April 30 and close on it by June 30. Current homeowners who are buying a new primary residence would be eligible for a $6,500 tax credit starting Dec. 1 if they owned their home for five consecutive years in the previous eight.

It is hard to argue with Congress; clearly something needs to be done.  But, can the mortgage market handle the new loans that will be generated?  The Fannie and Freddie bailout has already cost taxpayers $121 billion and the losses continue to mount.  Fannie announced that it lost $19 billion in the third quarter and it has requested an additional $15 billion in aid to stay afloat.

You don't have to be an economist to see what is happening.  The government is throwing massive amounts of money at this recession and we are continuing to slide.  The minute growth in GDP aside, unemployment numbers are growing.  That means more people who will have trouble making their mortgage payments.  Already, nearly 1 in 10 residential loans are delinquent!

The delinquency rate for all mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association.

Even if you are inclined to refinance or buy a new home in the uncertainty of today's economy, you may find it difficult to get approved.

Despite the government's effort to support the housing market, qualifying for a loan is still tough. Lenders have tightened their standards dramatically, so the best rates are available to those with solid credit and a 20 percent down payment.

The commercial real estate market has also been affected. 

Banks are in for another ugly year in 2010. But this time the problem will be the big batch of deteriorating commercial real estate loans on their books. 

And, commercial real estate professionals do not expect recovery until 2011.

To relay a personal story, I now find myself caught in a debacle with my lender, Huntington National Bank.  When times were good, Huntington had always been a pleasure to work with.  When I started Source of Title, Huntington graciously extended a line of credit for $150,000.  For years, I hardly touched it.  But, the past couple of years have not been so kind.  Last year, I had a balance of only about $12,000 on the line of credit and I voluntarily reduced my limit to $75,000.  This year, my balance is nearly $50,000 and Huntington has refused to renew it. 

I was told that there was no problem with my payment history, but they have tightened their lending requirements and the corporate underwriters would not authorize the renewal.  It is true what they say... "banks will only loan you money when you don't need it." I even offered to refinance my office to payoff the line of credit, and despite having sufficient equity, they have refused. 

I have come to realize that this type of financial crisis hits those of us in the real estate industry the hardest.  Our revenues are down, due in large part to the crisis.  That makes it doubly hard to obtain financing at a time when we need it the most.

So what is the outlook?  I believe that we are still in for a rocky road ahead.  As unemployment continues to rise, fewer are going to be able to refinance or purchase homes.  The tax credits will help spur some activity, but those buyers still have to qualify for mortgages.  And, when the tax credits expire, we will once again see declining activity.

Before we can have a real recovery, we have to see a lot of new job creation and we have to get the foreclosure rates under control.  This will be difficult as Fannie and Freddie continue to struggle under government control.  Despite massive bailouts to the lenders, new loans are tough to come by. 

Hold on tight... it's going to be a bumpy ride in 2010.

Robert A. Franco
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