Here comes that deferred mortgage crisis

David Dayen warns that Big Shitpile was never really fixed and that all the “extend and pretend” programs propping it up are about to run out. Wheee!

Go read the whole thing, of course:

We are nearly eight years removed from the beginnings of the foreclosure crisis, with over five million homes lost. So it would be natural to believe that the crisis has receded. Statistics point in that direction. Financial analyst CoreLogic reports that the national foreclosure rate fell to 1.7 percent in June, down from 2.5 percent a year ago. Sales of foreclosed properties are at their lowest levels since 2008, and the rate of foreclosure starts—the beginning of the foreclosure process—isat 2006 levels. At the peak, 2.9 million homes suffered foreclosure filings in 2010; last year, the number was 1.4 million.

But these numbers are likely to reverse next year, with foreclosures spiking again. And it has nothing to do with recent-vintage loans, which actually have performed as well as any in decades. Instead, a series of temporary relief measures and legacy issues from the crisis will begin to bite in 2015, causing home repossessions that could present economic headwinds. In other words, the foreclosure crisis was never solved; it was deferred. And next year, the clock begins to run out on that deferral.

The problem comes from many different angles. First, as the Los Angeles Times reported recently, home equity lines of credit—second mortgages that homeowners took out during the bubble years, essentially using their homes as an ATM—will start to feature increased payments, as borrowers must pay back principal instead of just the interest. TransUnion, the credit rating firm, estimates that between $50 and $79 billion in home-equity loans risk default because of the increased payments, which could add hundreds or even thousands of dollars to payments a month.

[…]

This didn’t have to happen. Loans originated since the crisis haveperformed exceptionally, although efforts to artificially change credit scores to juice riskier lending could change that. This is mostly about the failure to properly fix the crisis when the fire was burning. Obama Administration officials were primarily concerned in their relief efforts with “foaming the runway” for the banks, spreading out foreclosures so they could be absorbed more slowly. That’s why they resorted to fleeting solutions of dubious quality rather than principal reductions, proven as themost effective way to prevent foreclosures. “Getting write-downs was a far more permanent solution than temporary interest rate reductions,” said Dean Baker.

Kevin Whelan of the Home Defenders League believes principal reduction remains a good alternative to prevent the destruction that would accompany a second wave of foreclosures for hard-hit communities. “It’s long overdue but not too late for various parts of the Administration to make much more of this happen,” referring obliquely to Fannie Mae and Freddie Mac, which own or guarantee the majority of the nation’s mortgages and have still not agreed to principal reduction as a foreclosure mitigation strategy.

A second foreclosure spike could stunt the housing recovery and really smash communities just rising from the ashes of the crisis. Permanent solutions could have been explored when it counted to prevent this from occurring. Now we’ll have to hope things don’t go as badly the second time around.