Housing Problems: Not Dead, Not Past

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Kathleen Madigan

Oct. 21, 2010, 12:01 a.m. EDT

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By Kathleen Madigan of Dow Jones Newswires

NEW YORK (MarketWatch) "” The housing mess is much like William Faulkner's past: It is not dead; it's not even past.

The two latest drags come from the mortgage side of housing. The first stems from questions about the handling of foreclosure documents. All state attorneys general have started a joint investigation into how court documents were handled, including allegations of "robo-signing" in which employees signed documents without reviewing their veracity.

David Reilly discusses Bank of America's continuing foreclosure battle.

The second twist in the mortgage market is the request by Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.39, +0.01, +1.84%) , Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.40, +0.01, +2.04%)  and other investors that banks repurchase bad mortgages.

Once again, the economic outlook has a new uncertainty to grapple with. Although banks seem intent on restarting foreclosure actions, it is unclear whether the courts will allow them to move forward without better verification of documents or whether homeowners might fight evictions more strenuously.

Either move will delay foreclosures, but neither will get rid of them. And a buyback plan would make future mortgage activity less attractive to banks.

These new wrinkles will disrupt housing's path to recovery.

On the one hand, a delay in foreclosures will reduce the housing supply. According to the National Association of Realtors, about one-third of recent existing-home sales have been homes in distress, including foreclosures and short sales. Reduce the number of foreclosed homes on the market, and demand must shift to more traditional homes. (One bonus to this is that traditional homes typically carry higher prices, offering support to real-estate values.)

On the other hand, if banks respond to this new scrutiny by tightening mortgage standards, the higher bar will cut off a section of potential home buyers, causing another decline "” or at least slower growth "” in housing activity.

Difficulty in obtaining a mortgage is already holding buyers back. A survey by the NAR taken before the latest mortgage problems showed 43% of respondents cited "banks making it too hard to qualify for a home mortgage" as a huge obstacle to home ownership.

On Wednesday, economists at Wells Fargo /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 26.02, +0.42, +1.62%)   scaled back their housing forecasts "due to the recent increased scrutiny of the foreclosure process." Wells Fargo now projects housing starts to rise to an annual rate of 770,000 in 2011 instead of the previous prediction of 810,000. This year, housing starts are expected to total 590,000.

What could improve the housing outlook? Jobs, of course. Strong labor conditions enable young adults to go out on their own and families to trade up into bigger homes.

The job market, however, is healing very slowly. Consequently, job worries are keeping people out of the housing market. According to the recent NAR survey, 83% of respondents said the lack of job security was a huge or medium obstacle to home buying.

The new chaos in the mortgage market, which will likely drag on into 2011, just adds another headwind to home buying.

Kathleen Madigan is the primary author of the Big Picture column. This column originally appeared on Dow Jones Newswires.

Goldman Sachs reportedly made two separate moves with the same aim: restructure itself as a firm built to thrive in a post-crisis environment with new regulation.

11:41 a.m. Today11:41 a.m. Oct. 21, 2010

Easy way to end the foreclosure crisis. People start making their payments. No whining...I'd like nothing more than to be on the bus you're on.The motivation for making payments is not that a home buyer is making "rent" payments, but that they are theoretically getting closer to owning and possessing the title to the property they happen to be living in. Once they "own" the..."

- EsperanzaGoldQM | 12:36 a.m. Today12:36 a.m. Oct. 21, 2010

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