Foreclosures remain a serious economic problem, but cramdowns are not the answer, according to one key real estate trade association. In a teleconference Monday about the state of real estate finance, the Mortgage Bankers Association reiterated its opposition to allowing bankruptcy judges to modify mortgages for financially strapped borrowers even as it forecast an ever-faltering housing market for 2009.

“It will further destabilize an already unstable mortgage market, and consumers will pay the price,” asserted David G. Kittle, MBA’s chairman, about various proposals that would give bankruptcy court judges the authority to reduce a home loan’s principal or more in an effort to make a mortgage more affordable to a homeowner in trouble.

Cramdowns are understandably controversial, but it's also true that many Americans are already experiencing the financial consequences of buying too much house or choosing a poor home loan product for their situation. According to, an online home-value database, 29% of homeowners who purchased their house in the past five years are underwater on their mortgage. Millions are at risk of losing their homes; foreclosure activity jumped 81% in 2008, with more than 3 million filings on more than 2 million homes. Others are simply being battered by a change in their financial situation (The Home Depot alone announced Monday it would let 7,000 workers go) or sinking home prices, which plummeted nearly 20% on an annual basis in 20 major metropolitan areas, according to the recently released November Case-Shiller home price index.

Against such a backdrop, elected officials have been looking at cramdowns more closely. One proposed bill is making its way through the U.S. House of Representatives.

The association’s own research shows a startling jump in “roll rates,” which refers to the likelihood that a home loan that is a month past-due (i.e., delinquent) will go into foreclosure the following month. For much of the 1990s and the first half of this decade, that figure hovered between 10% and 15%, meaning that nearly all homeowners caught up with their mortgage payment before their home entered the foreclosure process.

Now, however, the national roll rate has risen to 35%, meaning that one-third of homes with missed mortgage payments go into foreclosure. And in foreclosure-ridden California and Florida, that figure has skyrocketed to levels of between 60% and 80%, depending on the quarter.

Against that backdrop, vacancy rates are rising, particularly in areas where the housing stock is newer. For homes built before 2000, the vacancy rate stands at 2%. That statistic climbs to 10% among houses built after 2000, according to Jay Brinkmann, MBA’s chief economist. 

Such trends certainly offer little hope for the housing market in 2009. “This is a recession that is different from others in the past in its impact on the housing market because the housing market is already weakened,” Brinkmann noted in Monday’s call, predicting “continued decline” in new-home sales as consumers opt for bargain-priced, recently built existing homes over higher-priced newer product.  As a result, he forecasts that new-home sales will drop 31.3% in 2009, to 335,000.

Like other economists, Brinkmann also expects housing starts to fall, particularly for single-family (down 32.7% to 419,000 in 2009, according to MBA’s forecast) due to the poor job market. “Anytime we get into the economic environment we are in right now … we have a drop in household formation rates,” said Brinkmann, because people are reluctant to move out and buy or rent a home in such uncertain times. Of particular concern to new-home builders: the unemployment rate among Americans with at least a bachelor’s degree. The college-educated “tends to be a group that buys homes,” according to Brinkmann, who highlighted a growing unemployment rate of currently just under 4% for these workers.

Alison Rice is senior editor, online, at BUILDER magazine.