The Coming Foreclosure and Commercial Real Estate Storms

When you read that foreclosure filings fell 10% in January from December, don't get too excited. According to Realty Trac, foreclosures are 15% higher than they were a year ago and there's likely to be an increase in foreclosure activity in the next few months, as the government's crappy mortgage modification program continues to fail.


James J. Saccacio, CEO of RealtyTrac noted that "if history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works." In other words, another storm is a-brewing in the housing market.

The continued reluctance of banks to tackle the foreclosure problem is astounding. There's near-universal agreement that principal reduction is the key, but we are left with lame programs, like this one announced yesterday by CitiMortgage. The so-called "strategic non-foreclosure" continues the "extend and pretend" policy that bank lenders have pursued over the past year.

From the banks' point of view, the longer they keep you on the hook, the better it is for them. Avoiding the mess of foreclosure allows them to keep the fictitious valuations on their books and in this new Citi program, ensures that some of the costs of carrying the dud loan get transferred to the borrower, who in all likelihood, will end up defaulting. Some experts believe that a new round of foreclosures could trigger a double-dip in housing prices.

As if the foreclosure mess weren't enough to keep you up at night, today we're also digesting a new report from the Congressional Oversight Panel (that's Elizabeth Warren & Co, the TARP watchdogs) about the looming storm in the commercial real estate market. The report predicts a wave of losses, totaling $200-$300 billion, from commercial real estate loans could "trigger economic damage that could touch the lives of nearly every American."

Here's how the dire analysis plays out: "when commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities." The report reminds us that the failure of community banks would further restrict small business access to capital, just the economic recovery is occurring.

Don't put away those shovels just yet--two potential storms could be coming.