In the good old, bad old days before the current economic crisis, American banks repossessed an average of approximately 100,000 homes per year. In July 2010, they repossessed 92,858 homes in a single month. This was 9% more June, and an increase of 6% year-on-year. The number of default actions topped 325,000 for the month in the shadow of another 5 million seriously delinquent mortgages. These had not yet been acted against because of ongoing mediation efforts.

Why is this still happening two full years after the bubble burst? What is going on in the American economy? The answer is that some things take time to work through to fruition. Time Lag to Welfare

When America hit economic ground zero two years ago, firms were quick to react and unemployment ranks swelled. However, those affected were able to continue servicing mortgage loans because unemployment benefits aim to replace lost income as nearly as possible. Things change when these higher benefits reach an end, and the individual converts to welfare.

Time Lag to Foreclosure

When mortgage payments cease with unemployment benefits, banks do not move straight into foreclosure. This is because repossession is their least-preferred final option, and they wish to avoid it too. Washington has stretched this lag by introducing HAMP. This means that time lags between a lost job, welfare, mortgage delinquency and final foreclosure will be with us always, and that the tail end of the American property crisis will take a long to finally disappear (when things pick up again).

Sub-Prime Loans

The biggest bogey-bear in the current situation is the discredited habit of awarding sub-prime loans to people who did not really qualify to own their home. These were loan agreements that set a honeymoon interest rate that trebled or even quadrupled after a period of eighteen months to three years. It has latterly become apparent that many borrowers either did not understand how sub-prime home loans worked, or were not told. Many ended up on the streets again, while their lenders walked away relatively unscathed. Many sub-prime loans were awarded in the last boom year, and their higher interest rates are clicking through right now.

Current single-family home prices are tracking the foreclosure rate and an improvement in market value is still some years away. In the meantime, more Americans will go underwater and at best achieve a short sale. We need an enhanced forward thinking capability in the Treasury Department to steer the nation through these troubled times.

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