An article out of the McClatchy Newspapers group caught my eye today…in particular some numbers that may not bode well for a robust real estate industry recovery any time soon.
Bailout and Regulation Nation
The article, about how a new financial world order has emerged out of the wreckage of the sub-prime mortgage fueled disaster that exploded one year ago this week, explains why it may take many years to climb back even half way up that economic ladder most of us fell down from last September.
“Over the course of 2008, the nation’s five largest banks reduced their consumer loans by 79 percent, real estate loans by 66 percent and commercial loans by 19 percent,” the article says, quoting data supplied by the FDIC.
It’s that 66 percent drop in real estate loans that threatens to preempt any meaningful recovery in the real estate market.
More to the point, the article details why that is not likely to change anytime soon: the fact that, says the article, “securitization is all but dead.”
Securitization Dead in the Mortgage Business
Securitization is how banks have managed to keep dishing out all sorts of loans to consumers because they didn’t have to carry those loans on their balance sheets: they packaged them and unloaded them on investors in the form of securities.
“The basis of revivial of the system along the line of what previously existed doesn’t exist. The foundation that was supposed to be there for the revival–of the economy–got washed away,” the article quotes James K. Galbraith of the University of Texas at Austin as saying.
Even with the massive federal bailout, banks are still nearly submerged in a sea of consumer debt of all sorts and lack any motivation to open up their purses and start lending still more money.
What Does the Future Hold for Real Estate?
That, in turn, means many banks are not likely to go out of their way to modify mortgages anytime soon. They’d rather collect hefty fees for late monthly payments than whittle away at the amount of money a homeowner still owes them. And, that, in turn, is likely to fuel more foreclosures in the months ahead–which, in turn, brings down the price of homes on the market. Any recent progress made in reducing a glut of unsold homes can quickly unravel as banks withhold aid, forcing more and customers to bite the foreclosure bullet.
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