The financial media has recently offered plenty of stories about a housing market recovery. But here's another fact that too few of those stories mention: Mortgage litigation is higher now than when the mortgage crisis began.
On Dec. 9, a securities and consumer lawyer told the New York Times that "We are at an all-time high for this mortgage litigation." The lawsuits involve some $1-trillion worth of mortgage-backed securities; banks stand to lose as much as $300-billion. The article also says: Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life. But this "fresh torrent" of mortgage lawsuits against banks is just one headwind that the so-called housing recovery faces. Four years after the worst of the mortgage crisis, the Federal Housing Administration may soon need a bailout. As you probably know, the FHA insures mortgages and often helps first-time homebuyers who have less than a 20% down payment get into a home. Well, the FHA has "expanded its role" since the depths of the financial crisis, by "backing mortgages with as little as 3.5% down payment." That's why the federal mortgage insurer is in hot water. The Nov. 16 Los Angeles Times article, FHA projected to exhaust reserves, notes that "The Federal Housing Administration ... said it ended September with $16.3 billion in projected losses -- a possible prelude to a taxpayer bailout." The FHA said that the slower than expected housing recovery led to the financial shortfall. One might wonder if housing market expectations for the future will also be off the mark. Even as observers have called for a robust rebound, EWI has been updating subscribers on the precarious state of the housing market. According to CoreLogic, more than one million U.S. home buyers who have taken out low-money-down FHA mortgages over the last two years already owe more on their loans than their homes are worth. The FHA’s policy of accepting almost no money down is deadly when prices slip. Yet somehow, amidst the carnage, optimism is actually blossoming. ... At a true bottom, virtually no one will be calling it.[emphasis added] The Elliott Wave Financial Forecast, May 2012 There's growing evidence that The Great Asset Mania has not reached a long-term bottom, and that includes residential and commercial real estate. The Federal Housing Administration was created in 1934 in response to a housing market that had been devastated by the Great Depression. And now the economic trend points to another rare period of deflation that could match or even exceed the economic carnage of 1929-1932.
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