By Greg Peel

In the year 2005, before the US house price bubble began to burst, US banks repossessed about 100,000 homes. In the month of July, 2010, banks repossessed 92,858 homes, according to RealtyTrac.

The figure was a shade under the record of 93,777 which was not at the height of the GFC but only two months prior. July's number was up 9% from June and 6% for the year.

The total number of “actions taken” in July – notices of default etc – was 325,229. The number of “seriously” delinquent loans is around 5 million, notes RealtyTrac, most of which would already be in foreclosure but for the fact banks and agencies are trying to provide “work-out” finance where possible. It is as much in the interest of banks to keep mortgage holders on a drip-feed as it is to the home owners given the lack of buyers for foreclosed property.

The numbers look rather frightening, and readers would be forgiven for wondering why 2010 is seeing a peak in foreclosures. We are almost about to mark the second anniversary of the fall of Lehman and the real GFC. But it comes down to a matter of lags.

When the GFC hit, companies were quick to lay off workers and unemployment shot up rapidly. But US unemployment benefits work by paying sacked workers a good proportion of their lost income, rather than a token amount, for a short period. Thus mortgage payments can be strung along, at least until those benefits expire and the sacked worker is forced onto welfare.

The fact that US unemployment has persisted just shy of the 10% mark means few workers have found jobs again and most have fallen into the welfare system. Then there is the lag of actually falling delinquent on payments. Banks do not just foreclose the day a payment is late. The process takes a while and banks try to avoid foreclosure until it is the only option.

So there will always be a lag from lost job, to welfare, to delinquency, and finally foreclosure. But there is a more emphatic lag to consider.

The big culprit in the mortgage foreclosure numbers is the subprime loan, and specifically the popular “reset” mortgage. This is where mortgages were written with a honeymoon rate of say 3% for anything from 18 months to three years, before “resetting” to a higher rate of maybe 13% or more. While there were likely many home owners who didn't quite understand what this meant in terms of obligation, and were simply bullied into loans by mortgage brokers, there was also supposedly a large cohort of Americans who saw an opportunity to own a nice house they couldn't otherwise afford to even rent, let alone buy, for three years. US mortgage laws then allow those mortgage holders to simply walk away.

No one worries about their credit rating, because they never had one anyway and at the height of the subprime frenzy a credit rating was not required.

The bulk of these dangerous reset (also known as Alt-A) mortgages were written right at the death of the frenzy in early to mid-2007. So we are only now feeling the impact of those three-year resets.

The reason why no one seems to be panicking too much is that this should then be the end of it, at least in terms of the reset wave, and the wave has been long anticipated. The Obama Administration has admitted to underestimating the problem nevertheless, and has since introduced some new fiscal assistance to home owners. However, the end of the reset wave does not mean the end of foreclosures, as US banks are not the primary writers of mortgages in the US.

The primary writers are the agencies of Fannie Mae and Freddie Mac, which write only “prime” loans (supposedly) on homes under US$700k in value. But you don't have to have a reset loan to be in trouble, so foreclosure rates for the agencies are still unnervingly high. The reality is that Fannie & Freddie – already effectively nationalised by the government - are drawing closer to requiring further recapitalisation.

It is estimated that the current rate of home sales in the US is only about keeping track with foreclosures, suggesting actual improvement is still some time off while high unemployment persists. This is of little comfort to building material suppliers based in Australia, because if you are an American who could afford a home, why build? A lot of the homes on foreclosure sale are recently built anyway, and all of them are cheap.

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