Belfast Telegraph

Jim Dee: Obama must avert housing crisis to avoid a catastrophe

President Obama must convince Wall Street that people are as important as profit if he is to avert the dreaded ‘double-dip’ recession this year, says US correspondent Jim Dee

Acknowledging the widespread anger sparked by the perception that his 2009 economic stimulus plan heavily favored Wall Street over Main Street, Barack Obama vowed, in his first State of the Union address, that his 2010 focus will be on job creation for |ordinary Americans.

But, if predictions about another looming US real estate crisis prove true, will Obama stand a chance of making good on his promise?

Unexpectedly strong fourth-quarter GDP figures no doubt gave the White House some comfort after the sting of Senator-elect Scott Brown’s upset victory, taking the safe Massachusetts seat.

However, since the 5.7% bump was based largely on a replenishing of depleted business inventories, it’s clear that sounding the death-knell of the ‘Great Recession’ would be premature.

In part, that is because unemployment in the US, although it hasn’t risen in the last three months (and actually dropped 0.1% last month), still stands at 10%.

Housing sector dispatches aren’t any better. According to government figures released last month, sales of newly built homes slid 7.6% from November to December — a nine-month low.

In addition, already-worrying levels of mortgage foreclosures are on the rise.

December figures showed that, between those in the process of foreclosure and those more than 60 days delinquent, about 10% of all mortgages in America are listed as being problematic.

According to California-based |RealtyTrac Inc, 2009 saw a record 2.8m homeowners threatened with foreclosure. In December, banks across the country repossessed some 92,000 houses — a 19% jump from the previous month.

But, as bad as those recession-driven figures may be, some fear a second — and potentially more devastating — wave of foreclosures could be in the offing later this year.

Remember all those clever mortgage products that got people into homes they hadn’t a prayer of affording — the ones that made the bankers filthy rich? Well, they haven’t gone away, you know. The two potential villains of |the piece are Alt-A (Alternative A) mortgages, and Option-ARMs (Adjustable Rate Mortgages).

Popular during the heady Wild West height of the mid-Noughties housing bubble, both were designed to make houses affordable to people who otherwise wouldn’t have chance of owning. They were more risky, with clients often having a higher debt-to-asset ratio than standard loans, and less documentation was needed for loan approval.

The basic thrust was to allow borrowers to pay principle only for a period of years, after which time the mortgage would be ‘reset’, with deferred interest being added to the monthly principle payment. In the case of the Option-ARMs, |ballooning interest rates will add to the pressure.

The result is that, when these mortgages begin to ‘reset’ this year, monthly payments will rise between 63% and 100%, depending on the |individual loan.

According to some estimates, roughly 30 million of these Alt-A and Option-ARM mortgages — worth roughly $1 trillion — will reset between now and the end of 2011. As such, the potential for defaults and foreclosures is very real indeed. By some calculations, |upwards of 50% may buckle.

If such a wave were to hit the housing market again, it could the ‘double-dip’ recession economists have been dreading.

Some experts insist that the Federal Reserve Bank is on top of things and that it and other powers-that-be will intervene swiftly in such a scenario.

Others believe that, given the gargantuan $3.83 trillion budget proposed by Barack Obama — which boosts the deficit to a record-breaking $1.56 trillion — there’ll be scant bail-out money available if such a housing crisis does hit.

One way or another, Obama |will have to find a way to do |something he hasn’t been able to do yet: convince US banks that people are as important as profits — and that bankers’ interests are best served by working with troubled homeowners to find mutually |beneficial solutions.

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