Foreclosure losses picked up by taxpayers, investors

From the Arizona Republic 01/30/11
Catherine Reagor

In a historic wave of foreclosures, countless thousands of Americans have given up their homes, unable - or unwilling - to pay the mortgage. Plunging values left their homes worth far less than the amount of their loans.

Many borrowers let banks take the houses back, believing the lenders would simply resell them at a loss. Some borrowers even did so out of spite, angry that lenders wouldn't help them refinance or adjust their payments.

But in many cases, banks lost little or nothing on those foreclosures.

Instead, the biggest losers have been market investors and the American taxpayers.

Most foreclosures now are on loans that were issued by banks but backed by government-owned Fannie Mae and Freddie Mac. Created to boost U.S. homeownership, the Federal National Mortgage Association and the Federal Home Mortgage Corp. buy mortgages from banks and now own half of all mortgages.

It's a system that was built to encourage banks to make mortgages and keep being able to make more. But the system also means that when homeowners stop making mortgage payments, the lenders who issued the mortgages don't take the biggest loss.

"Fannie and Freddie losses are passed onto taxpayers," said Anthony Sanders, a former professor of real estate and finance at Arizona State University, now with Virginia's George Mason University.
Those federal entities' losses are expected to near $400 billion before the foreclosure crisis ends.

Many other mortgages that have failed were even riskier than the ones bought by Fannie Mae and Freddie Mac. Those were packaged by the financial industry and also resold to investors. When those loans fail, investors lose.

And many of those losses could end up hitting taxpayers, too. Big investors included government pension funds and other public agencies."If the federal government begins bailing out pension funds," Sanders said, "then the taxpayer pays for that, too."

A report from a federal inquiry into the financial meltdown, issued last week, concluded that those investments were bundled and sold even as housing prices declined - and that investors were let down at many steps along the way.

Regulators who could have seen the failures didn't understand the system, the report found. And a top investment-rating agency labeled the packaged mortgages with the top, AAA-grade, rating without reviewing the quality of the mortgages themselves.

"It has become musical chairs for mortgages and foreclosures," said Jay Butler, director of realty studies at ASU. "Whoever ends up holding the mortgage at the end holds the bag for the loss. Unfortunately, taxpayers will end up with the biggest tab."

Since 2008, nearly 150,000 homes have been foreclosed on in metro Phoenix. Housing analysts are concerned that the housing market is only halfway through the foreclosure mess.

While foreclosures continue, banks have drawn public ire, being quick to accept federal bailouts but slow to respond to federal plans meant to help struggling homeowners.

"I understand why some people want to walk away, but we should all understand who ultimately pays the bill for foreclosures," said Amy Swaney, former president of the Arizona Mortgage Lenders Association and Arizona manager of Citywide Home Loans. "Most foreclosures end up costing us all."