By Jim Perez,
DebtHelp, Inc. Staff Writer
As the once soaring U.S. housing market crashes and burns, banks and consumers around the world are also being scorched.
The number of U.S. foreclosure filings reported in August 2007 is more than double those reported in August 2006. This is also a 36 percent spike from July of this year.
This trend is a flashing red light that an increasing number of homeowners are unable to make timely payments on their mortgages or sell their homes in this burgeoning national housing slump.
According to RealtyTrac Inc., 243,947 foreclosure filings were reported in August, up 115 percent from 113,300 in August 2006. There were 179,599 foreclosure filings reported in July of this year. The filings include default notices, auction sale notices and bank repossessions. Some of these may be duplicate notices if the owners have multiple mortgages. The August total is the highest reported in a single month since RealtyTrac began tracking monthly filings two years ago.
The national foreclosure rate in August 2007 was one filing for every 510 households, the company said.
High-risk subprime mortgages, loans extended to borrowers with weak credit histories, are behind the spike in defaults. The growing number of bad loans has forced a number of lenders into bankruptcy, while hedge fund and other big investors in securities backed by subprime mortgages took deep financial hits.
The roiling waters are fueling a tsunami in the financial markets.
Across the Atlantic, in Great Britain, hundreds of customers lined up to withdraw their savings from Northern Rock Bank, ignoring government assurances that their money was safe. Police were called in some cities to steer panicked crowds away as branches were closed for the day.
The Sept. 15 run on the bank was caused by fears over its earlier request for an emergency Bank of England loan amid the global credit crisis. Northern Rock, Britain’s fifth-largest mortgage lender, is the first British bank in 15 years to be bailed out by regulators.
News reports cited â€œan unidentified person described as close to the situation,â€ who said customers on Sept. 15 withdrew $2 billion, about 4 percent of its deposit base, from the bank. The bank declined to confirm the figure.
Even as Alistair Darling, British Treasury chief, and the country’s Financial Service Authority tried to assure customers Northern Rock is solvent, news reports said Northern Rock was preparing for a sell-off. Unidentified sources were quoted as saying one plan would divide the bank’s mortgage portfolio between other major banks in what would be a private-sector rescue of the lender.
The bank reportedly made the loan request earlier in the week because it relies heavily on wholesale money markets for cash. Its cash crisis has been attributed, in part, to the subprime mortgage woes U.S. banks are experiencing. Although Northern Rock requested substantial emergency funds at a penalty rate, the bank has said it had billions of pounds in cash at its disposal. It has yet to draw on any emergency funding.
Backing up Northern Rockâ€™s assurances to its customers, Darling said all deposits at the bank will be guaranteed. He said the cost of safeguarding the deposits, if required, would come from the company’s assets. He assured customers that Northern Rock was solvent.
Back in the United States, the financial woes for American Home Mortgage Investment Corp. continue to pile up. The lender filed for Chapter 11 bankruptcy protection Aug. 6.
In mid-September, American Home issued checks to pay the property taxes of more than 70 homeowners in the Baltimore metropolitan area: Those checks bounced, Baltimore County officials said.
“This is just another chapter in what is a very difficult time for the mortgage industry,” Donald I. Mohler III, a spokesman for Baltimore County, said in news reports. The county no longer accepts checks from American Home.
The City of Baltimore received bad checks for 53 properties â€“ a total of about $63,500. Baltimore County said American Home Mortgage checks bounced for 21 properties, totaling $41,000. Taxes are due at the end of September.
A Baltimore spokesman said the city doesnâ€™t plan to notify property owners. If the problem isnâ€™t resolved before, they will find out in November, along with other delinquent taxpayers. Baltimore County has alerted the property owners.
Greg McBride, a senior financial analyst at Bankrate.com, hinted the problem might not be limited to bounced checks. “What I’d heard is the checks weren’t being sent.”
Homeowners often make monthly payments for property taxes, insurance and other fees to their mortgage companies to be set aside in escrow funds until the money is due.
American Home Mortgage has not explained the bounced checks, nor has it said whether it has money to cover the checks or what it intends to do. Escrow accounts are protected by state law from creditors during bankruptcy proceedings.
Compounding American Homeâ€™s woes, some of its former employees are fighting to block the company’s creditors from accessing a retirement plan that contains $11.6 million of their savings.
In a filing on Sept. 18 in bankruptcy court in Delaware, Sean Malloy, attorney for the 43 former employees wrote that “Participants were induced to enter into compensation-deferral agreements and participate in the plan with promises of the value of tax-deferred investment growth and little if any discussion of the risks associated with insolvency.”
The court filing claims that employees who contributed to the plan may have been misled. “It is hard to imagine the employees would have chosen to make compensation deferrals if they knew that their claims would fall behind the rights of lenders,” Malloy wrote.
American Home Mortgage had no comment, according to reports. A hearing is scheduled for Oct. 1.
Don Lindner, a compensation expert with World at Work, a nonprofit group that focuses on employee benefits and compensation, said the likelihood of the employees succeeding is very slim, because such “non-qualified deferred compensation plans” are not subject to the same government protections that a worker would receive under a traditional 401(k) account.
“They will have to stand in line behind those creditors with priority,” Lindner said. “They will be treated just like any other creditor; they have no special rights.”
The deferred-compensation plan enabled American Home Mortgage employees making more than $200,000 annually to save money tax-free until they retired. But it’s not the same as a 401(k) account.
“This system is only for highly paid employees, who are limited in what they can put into a 401(k),” Lindner said. “They look and feel like a 401(k), but the difference is the money can’t be put into a trust like a 401(k).”
American Home has more than 1,000 creditors, some of which already have priority claims on the firm’s assets; many are not expected to recoup any money at all.
American Home has laid off 6,000 workers this year. The struggling mortgage and housing sectors have cut more than 80,000 jobs this year. Nationwide, about 516,000 people have been laid off.
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