“Oh, yes, we have class warfare in America. My class is winning.”

                                                                              Warren Buffet

In our current financial crisis, the activity of significant lending by banks to those who wanted to own a home was followed by those banks selling off the mortgage loans to investors. This had two consequences: the banks no longer were responsible for their loans (the loans were not on their balance sheets); thus, the banks became incredibly irresponsible about whom they would loan money; and two, once the mortgages were sold, the investors bundled those loans, and, thus, no one was able to keep track of who’s got what and to whom. This bundling is called securitization.

Of course we can change this. We can regulate the banks. We used to do that . It was called the the 1933 Glass-Steagall Act and it prevented banks from being so irresponsible that they could sell mortgages. Over time the Glass-Steagall Act’s powers were eroded by both Republicans and Democrats. (Yes, the Democrats were also responsible, not everything can be blamed on Ronald Reagan.)

Not only did Congress eroded the Act so did the Federal Reserve Board which has regulatory jurisdiction over banking, but not the stock market. Therein lies the rub. The banks were increasingly losing profits to nonbanking institutions who were intruding on banking territory. Congress got so nervous that in 1994, when Congress was still under Democratic rule, Congress passed the Home Owners Equity Protection Act. It empowered the Federal Reserve board to make rules for mortgages even for institutions that were not banks.  (I say this in case you think it doesn’t matter which party wins – it does matter).

Wonderful! Except Mr. Greenspan, head of the Federal Reserve, did not enforce the regulation. Remember Mr. Greenspan, he believed in the power of the market to self-regulate. We didn’t need regulation.

Now we are at the point where most sensible people say – we need regulation, let’s figure out what that will be.  However, we have the Republicans saying we have too much regulation and since the minority is running the Senate, we could end up with no new regulation to address this financial crisis.  What a country!

In March 2009, according to CNN, during the first half of 2009 1.5 million homes began the trek down the foreclosure process—representing 1 in every 89 households.

CNN which used data provided by realtyTrac broke down the data to show the 10 states where the most mortgage foreclosure activity is taking place. Here’s the data:

1. Nevada 1 in every 70 houses in foreclosure
2. Arizona 1 in every 30
3. Florida 1 in every 33
4. California 1 in 34 houses
5. Utah 1 in 69
6. Georgia 1 in 70
7. Michigan 1 in 74
8. Illinois 1 in 76
9. Idaho 1 in 79
10. Colorado 1 in 80
11. Ohio 1 in every 86

According to a story on the Washington Post, the rate of home foreclosures in 2009 is expected to crest over 1.8 million (vs. 1.4 million in 2008). The main cause for the sharp uptick in foreclosure filings is not the continuation of the sub-prime crisis—but actually the sharp increase in unemployment rates.

A.according to a regular monthly report from RealtyTrac, the online marketer of foreclosed properties, nearly 1.2 million have been lost since the foreclosure crisis hit in August 2007.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure.The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009.

“What has not changed, however, is the oversized impact of California, Florida, Arizona and Nevada in driving up the national numbers.  Those states continue to account for about 46 percent of the foreclosure starts in the country, and represented 56 percent of the increase in foreclosure starts, including half of the increase in prime fixed-rate foreclosure starts. 

“It is difficult to overstate the severe impact home price declines have had on mortgage performance in those four states.  10.6 percent of the mortgages in Florida are now somewhere in the process of foreclosure.  In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent. 

“In the first three months of this year, foreclosure actions were started on 3.4 percent of the mortgages in Nevada, 2.8 percent of the mortgages in Florida, 2.5 percent of the mortgages in Arizona and 2.2 percent of the loans in California.  In comparison, the states with the highest foreclosure rates in the hard hit Midwest were Michigan and Illinois at 1.5 percent and Indiana and Ohio at 1.3 percent. 

Another way to look at it is the Mortage Banking Association in May 2009: While the national foreclosure start rate was 1.37 percent in the first quarter, in California, Florida, Nevada and Arizona it was 2.45 percent.  Absent those four states, the national rate would have been 1.01 percent.

What has the Obama administration done to halt foreclosures? Not much. First, it has shored up the Federal Housing Administration.  As banks have clamped down on mortgage lending, the FHA program has emerged as one of the few ways people can buy a home these days. Banks are more willing to make FHA loans because they come with a federal guarantee to cover losses if the borrower defaults. And borrowers can more easily qualify for FHA loans because they only need 3.5% down and can have lower credit scores.

As a result, demand for FHA loans has exploded. FHA loans now account for 23% of the market, up from 2% in 2006, Stevens said. Some 80% of first-time homebuyers go through the agency. The agency, however, has also seen a spike in delinquencies amid the mortgage meltdown. Some 14.42% of FHA loans were past due in the second quarter, up .58 percentage points from the same period a year earlier, according to the Mortgage Bankers Association. Just under 3% of FHA loans were in foreclosure, up .22 percentage points.

Concerned about rising defaults, the agency has raised its standards for new borrowers. Only 7.5% of the portfolio has a credit score below 620, down from 50% two years ago. The average score is 690, versus 630 two years ago.

Second, in July 2009 five months after launching the Home Affordable program designed to keep millions of Americans from losing their homes to foreclosure, the Obama administration had to summon mortgage executives to D.C. in late July to ask: What gives? So far, 230,000 loan modifications are up and running – a drop in the bucket.

Hope for Homeowners – On May 20, 2009, President Obama signed into law the Helping Families Save Their Homes Act.  This act modifies the HOPE for Homeowners. For borrowers who refinance under HOPE for Homeowners, lenders will be required to “write down” the size of the mortgage to a maximum of 90 percent of the home’s new appraised value. This program is still little used.

What should we be doing? President Obama and Congress need to revisit proposed legislation to authorize bankruptcy judges to modify or “cram down” mortgages. Give the courts the right to rewrite mortgage terms during foreclosure proceedings. This is the fastest way to stop the loss of millions of homes.

Note: One of the most interesting blogs about foreclosures and bankruptcy is Craig Robbins’s blog, Long Island Bankruptcy.